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Should You Loan Money to a Family Member?

Should you loan money to a family member? Lending money to a member of your family is tricky at best, and a terrible idea at worst. At some point in your life, you are likely to find that someone you are close to falls upon hard times. It’s possible that they might ask for some financial help from you. They may have lost a job, have medical issues,  gone through a divorce or any other combination of life circumstances that could cause a financial crisis. The potential issue with loaning money to anyone, but especially a family member, is that they may not repay the money, creating friction in what was once an excellent relationship. You need to decide whether the benefits outweigh the potential consequences for everyone involved.

If you are considering should you loan money to a family member, here are some important things to consider.

Ask Questions

Prior to lending your relative any cash, ask them some serious questions. Why do they need to borrow money? Do they have any other options? Is there a job or a resolution to their situation on the horizon? These questions will enable you to properly assess whether their situation is likely to get any better and if you are their last option. Their answers might help you determine how likely they are to repay the loan as well.

Delay Your Answer

You may feel pressure to answer straight away, but give yourself time to consider the situation. Giving you more time to think will also give them time to assess whether borrowing money from you is the right option for them. A bit of delay could result in an improvement in their financial situation, meaning that a loan from you is no longer necessary. A loan from a family member is a major responsibility and should only be offered when there are no other genuine options available.

Consider the Relationship

Lending money to a family member has the potential to change the nature of your relationship forever. Aside from the fact that you may not receive repayment of the loan, others family members may take sides if tensions arise and the relationship gets strained. If you decide not to lend them money, things could also get tense for a time. If you decide that a loan is not possible for any reason, you may consider offering them a small cash gift instead to show that you care about them and their situation.

Help Find Alternate Options

If you do not want to, or cannot afford to lend money, help brainstorm other possible suggestions. Could they make some extra cash by doing some babysitting? Is it possible to contract some outside work doing household tasks, gardening, completing online surveys or writing articles?  Although these suggestions will not raise money quickly, the solutions may help to deal with the underlying problem.

Be Willing to Lose Any Money You Lend

If you decide to lend your relative money, you must be prepared to lose everything. Their situation may never improve, meaning that they genuinely cannot afford to repay you. With this in mind, do not lend more than you can truly afford to lose. It’s also important to go into the arrangement with a mindset of preserving the relationship if that’s truly important to you. Don’t allow money to sabatoge a truly meaningful relationship as long as it is within your control.

Consider Saying No

It can be difficult to say no when someone you care about asks you for assistance, but it could be the only wise solution. For example, your relative may be asking for money to meet a regular monthly shortfall. If they are short of money every month, they will not be able to pay the debt, unless they have a definitive resolution available in the future. Sometimes, saying no is the kindest answer if it spurs the individual toward a change that needs to be made.

Agree  to Everything in Writing

You need to get the loan agreement between you and your family member in writing. This document should include information such as the amount they are borrowing, the repayment terms agreed on, and the rate of interest (if applicable). This will help to ensure that everything is 100% clear to both parties. You probably will not take legal action against someone you love, but having everything in writing is always best for clarity and covering the bases for everyone involved.

Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt free. Speak with a certified counselor for a free debt analysis today!


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