Your sister comes to in a bind. Even though you and your wife have weathered the bleak economy pretty well with your secure jobs, Linda hasn’t had the same luck. When her husband left her with the kids a few years back she worked hard to get back on her feet. They even lived with you, Derek, Jeremy and Hayden a few years back. It was a stretch, but you made it work for family.
Now that she wants to buy this new car for work, she came over for coffee and you could see that it was eating her up to try and figure out how to ask. She was embarrassed and she knew that your wife didn’t exactly welcome them with open arms the first time they came to live with them. He’s a good guy, but now you’re wondering what to do. You remember what happened between Uncle Jake and your dad all those years ago over what is now called, “The Bass Boat Blunder of ’63” and you don’t want to repeat history. Uncle Jake took the resentment to his grave and it really made your dad sad.
Yes, we’re talking about if you should and how to lend money to family. We already saw why I won’t lend money to friends, but this is a different chapter.
Can you truly afford it?
Even though you and your significant other are surviving the economy today, what would happen if one of you lost your jobs tomorrow, or had a catastrophic illness hit? Remember that if you are relying on that nest egg for those emergencies, then you shouldn’t be using that as the basis for a loan. There’s a chance the loan won’t come back. By nature of the fact that the rules of a family operate differently than a bank (for good reasons) there is a chance that the family member won’t put you high on the list of people to repay when they have to choose between that and groceries. “The Bass Boat Blunder of ‘63” (or Triple B to her mother) ended up sadly because Uncle Jake took a second mortgage on his house to help dad buy a boat that they were going to split on family vacations. When Dad’s business tanked with the new highway coming through, Jake got stuck with the entire payment. Dad tried his best, but the damage was done…
What is the reason for the loan?
The question is if Linda truly needs a new car or if she hasn’t been budgeting as well as she could have. After all, as much you loves Linda, Linda can’t pass up a pair of shoes to save her life. You know Linda needs reliable transportation to get to work, but the little apartment that they set up is pretty close to a bus line.
Treat the loan as a business arrangement
Write it up like a banker. Contracts are at a base level, just documents that try to keep misunderstandings to a minimum. You don’t have to charge horrible interest or late fees. The sheer act of communicating over a contract may help the family member consider other options. To figure out payments and schedules you can look up different loan calculators on the internet. Included in this agreement is what happens if the family member defaults on the loan. The more official you treat it, the more the chances of it not breaking the family apart.
Communicate, communicate, communicate
If Linda is your sister, the first person to talk to is your significant other to make sure you are both on the same page about loaning money to family. Some families handle this situation better than others. If your SOis on board with it, then there needs to be transparency as to how the payments are made and how progress will be monitored if Linda gets the loan. Along the way, adjustments may need to be made, or Linda may need to find a way to pay you off early. What happened with the Triple B is that Uncle Jake quit talking to your dad, so even when he tried to make amends and extra payments the emotional damage was done. Frequent, transparent and civil communication over the loan has to take place, or you may want to consider other options for the sake of family relationships. Money can come and go. Family is forever.
What do you think about this? Would you lend money to family? If you did so, did you have any problems afterwards?
[photo by Matt Straton]