Should You Lend Money to Family?

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]

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17 thoughts on “Should You Lend Money to Family?”

  1. The short answer is no. If you can avoid it, by all means do. It tends to get complicated afterwards especially if the family member feels that as family he isn’t obligated to pay back. If you are to lend, as you point out, make sure you can afford it or better still, give it as a gift as expect not to be paid back thus eliminating any hard feelings afterwards.

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  2. I think the thing with loaning money to your family is – a lot of the time, it is done out of guilt. They sort of trick you into loaning money with the way you are asked, and then you feel like you have to because they are family.

    Your tips are great though and I think I will try and avoid giving them money when I can do now because I cannot afford it at all.

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  3. Depends. I don’t loan money for a new car, come one, get a second hand one, it won’t kill you (and buy it yourself). I do help out my family (father and grandmother, we’re not talking other relatives), if they need, since they also helped me when I was in a ‘bind’. They do pay their ‘debt’ so it’s not that I’d be wasting money on them.

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  4. Lending money is always a tough issue…but I’m close with family, especially my immediate family. I don’t think I could say “no” With my immediate family, they are frugal, budget, and do not buy things frivolously so I know if they need a loan, it is a true emergency.

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  5. The answer is no, but I’ve had to do it anyway. Instead of writing it up like a loan, I just give it and assume it’ll never come back. It’s the only way to keep it from destroying the relationships.

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  6. From personal experience I think loaning money is a bad idea. My brother and I fell out over a $50 loan the he refused to pay. It wasn’t about the money but about similar situations happening in the past. I say if family needs money and you have it give it to them. Don’t loan it!

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