Should you lend money to family and friends? It can be a tricky and emotionally charged decision that families face from time to time.
In some situations, it’s obvious that a loved one had an unexpected emergency pop up and lending money them for a short bit is the right thing to do.
Other times, it may be a bit murkier. Here are five questions to ask before reaching into your wallet:
Is Loaning Money the Best Move?
What if a dear friend asks you for help? Their car broke down and they need to fix it so they can get back to work.
The two of you talk and decide to loan them what they said they needed.
Some of that money came from your emergency fund, but you figure it’s for a good cause and you’re doing okay so there’s no immediate need.
Weeks pass (and a paycheck or two later), that relative hasn’t said a word to you about paying some of the money back.
Another month passes and you see on Facebook they took a vacation. What now? How would you feel?
How about one of your favorite family members asking to co-sign on a loan? What would you say?
Lend Money? Finding a Way to Help Family and Friends
We’ve had to deal with different situations and we discovered that loaning money is not always the best money move. In fact, as a general rule, we don’t lend money to family and friends.
Not only was it stressful dealing with whether or not the loan would be paid off but in some instances, it only made things worse off for our loved ones.
We weren’t fixing a problem, we were throwing a bandage on it. We also hated the feeling of someone owing us money. It just changed the dynamics of the relationships.
Are We in a Position to Help?
First off, before loaning out any money, you really need to get a handle of your own standing. Are you in a position to financially assist them?
One example I heard that stuck with me is how on airplanes when the flight attendant talks emergencies and using air masks they always tell you to put yours on first before others.
As a mom, my first instinct is to help my kids, but it’s wiser to go in the recommended order. It’s a matter of a few seconds to have that mask on, but being ready would allow me more flexibility to help my kids as needed.
Your finances are similar. In an ideal world, there would be no hiccups, but things come up. What if you give some of your savings from the emergency fund to help out, but then you get hit with the problem?
Now you’re stuck in a situation where you need assistance and you may resent not having that money back.
I hope you don’t get hit with that situation, but it’s something to consider.
How Will This Money Be Used?
Let’s say you do have some money saved up that you’re okay with loaning out. The next step is asking your relative or friend what they need the money for.
Is it for an emergency? Or is it a situation they could’ve planned for? You don’t have the nitty-gritty details, but you also want to be on the lookout for any vague answers.
Do they have a plan and have they budgeted things reasonably? What you’re looking for here is seeing if they have thought things through. When do they think they can pay you back?
It might seem harsh but consider the alternative. If they went to a bank to get a loan, they would have their finances combed through or get stuck with a bad rate because the bank considers it a riskier loan.
Do They Have a History of Needing Bailouts?
It doesn’t necessarily mean they’re automatically denied, but you have to come at it with clear eyes so you can offer the best help.
Is the root fo the problem external -something genuinely unexpected happens -or is it a lack of money management?
Having this discussion can be an eye-opener. You might discover that don’t have a real plan to pay you back. They’re just winging it.
For some, it might make them realize they need to change, while others may dig in even further. It’s better you know upfront.
Lend Money Wisely
If you do decide to lend money one of the best things you can do is to get everything in writing.
This is a protection for you and them. Money can bring out emotions and sometimes our memories are imperfect so having a written record can help keep everything objective.
Clearly spell out how much is being loaned and for how long. Create a payment plan using a loan payment calculator that is realistic.
Doing this extra work might seem unnecessary, but it can be the wisest move for both of you.
How to Help Friends and Family without Loaning Money
Let’s consider some of your other options now. You may decide you want to help, but lending is not in the cards for whatever reason. What can you do then?
Gift Them Money
Instead of a loan, give them a gift. Choose an amount that doesn’t put your own finances in danger. This allows you to help without changing the dynamics of the relationship. That way if they can’t or won’t pay back, you’re not upset.
If they want to pay you back, you could tuck that away in a giving fund in case someone else needs help later.
Share How You Budget
Sometimes it’s a matter of managing money in a different way. You don’t have to see their numbers, maybe you can recommend a spreadsheet or money app like Mint to help them get a clearer idea of their cash flow.
If it’s a larger issue, you can be a huge help by finding relevant local resources and agencies.
Different organizations, like Single Stop, are dedicated to assist particular communities that they may be eligible for.
Giving them a ride for an appointment, accompanying them as they fill out paperwork, or watching their kids as they take care of what they need to are all practical ways to help.
Your Take on Lending Family and Friends Money
It’s not always easy to know what’s the best course to take, but I hope these guidelines give you a clearer idea of what would be useful for your loved ones.
I’d love to get your take on this delicate situation. Have you ever lent money to loved ones? How did it work out?