How To Loan Money to Loved Ones
Why Lending Money to Family and Friends Can Be Stressful:
Have you ever fought with your partner over whether or not to lend money to loved ones?
We have all heard the horror stories about someone lending money to a family member or friend and how it all went horribly wrong. Even so, if someone we love comes to us in a financial bind, it may be very difficult to turn them away.
For instance, your favorite cousin lost her job and has no emergency fund. She calls you in a panic because her rent is due, and she has no idea how she will pay it. It would be really hard to say no and leave her hanging! Learn how you can help your loved ones without messing up your money and relationship.
Here are a few reasons why you should probably say no:
You don’t have an emergency fund yourself, or your finances are not in tip-top shape. You should never give money when you’re not financially stable yourself. You may have heard the saying, “Do not lend money you cannot afford to lose.” You may do so assuming your friend or family member will pay you back before you need it, but there is no guarantee that they will. This could land you in your own financial bind and cause you to have to borrow money yourself.
A rule of thumb I follow is to set my giving budget for the year and per month. I decide how much of my income I would like to allocate to give to others and how often. Each month I give only a certain amount of money. That could be to family and friends, charities, or anyone I see in need and feel called upon to help. This means that once I have reached my limit for the month – that’s it. Another great idea if you have people in your life that you know will ask you for money is to add a budget category just for that person if you plan on helping them. This will prevent you from overspending while trying to be helpful.
No one enjoys paying debt. This could cause the person who borrowed money from you to resent you and inevitably strain your relationship. I have my own saying when it comes to loaning money, “Do not lend money you cannot afford to lose or to a person you do not want to lose.” You don’t want to lose a great friend because of a money dispute.
You could get hit with a tax bill. If you lend more than $13,000 you will be required to pay a gift tax unless you document the loan and set legitimate repayment terms and conditions. Because of this, you also will have the additional task of getting an accountant involved to make sure you are protected.
You could give the wrong impression or enable bad behaviors. After you say yes once, you may give your friend or family member the idea that they can continuously rely on you for money. It can also cause other friends and family members to begin looking at you as a cash cow. This situation can become even worse if you say yes to one person who asks to borrow money and no to another person. If you really care about your friend or family member, you don’t want to enable their bad behaviors. Saying no could actually help them more than giving them the money, because they will be forced to learn better money management skills rather than having someone bail them out constantly. If I find someone asking me for money multiple times, I offer to help them create a budget or even pay to enroll them into a personal finance course instead of giving them more money.
Saying no to someone you care about can be difficult, but there are ways to do it without ruining your relationship. Try saying any of the following:
● “I’m sorry. I wish I could help you, but that’s not in my budget.”
● “I have lost too many relationships because of money, and I don’t want to risk losing you.”
● “I made a sacrifice to help you before, and you have not returned the money. I’m sorry, but I can’t give you any more money.”
If you do decide to lend money to someone you trust, here are a few rules to follow!
These rules will decrease your chances of regretting your decision and possibly losing a friend or family member.
Only give cash! Never cosign or take out credit in your name for someone else. You don’t want to put yourself in a situation where the actions of someone else could affect your credit.
Only lend what you can afford to lose. It is even better if you can give and not expect repayment at all.
If you must lend money in lieu of giving the money as a gift, put the amount loaned and repayment terms in writing. Be sure this agreement is signed by both you and the recipient. This agreement will prevent any future misunderstandings about the terms of the loan and protect you both in case of a misunderstanding.
Do not, no matter how difficult, micromanage how the person you have loaned money to uses your money or their own money. It may be difficult to watch this person go on a shopping spree when they have not repaid your money, but it’s not your place to decide how they spend their money. Your only concern should be that they are adhering to the repayment terms and dates you have set with them regarding the loan. It may be a good idea to distance yourself from the person until the loan is repaid if you find yourself struggling not to be concerned with their spending.
Lending money to friends and family is not the best financial choice you can make, but I understand that your love and compassion for a person may outweigh standard financial advice. If you find yourself in this situation, always use your head and not your heart. Follow these rules and do your best not to be taken advantage of and to keep your relationships intact.
I would love to get your take on this delicate situation. Have you ever loaned money to loved ones?