Should you lend money to friends or family?

The short answer, NO.

End of post, thanks for reading.

Just kidding!

The more complicated answer is, it depends.

Money is a topic that rouses a multitude of emotions.

Money is associated with greed when you want it, scarcity when you don’t have it, luxury when you are making a lot of it and possibly jealousy when others have more of it then you do.

When it comes to lending money from friends or family this can bring a whole new bag of emotions into play.

If you are not in the position to lend money or you don’t trust that the borrower will pay it back you might feel anxiety, doubt, discomfort, frustration or anger.

If you are in a position to lend, and the borrower is trustworthy and reliable, perhaps you feel happy and lucky for that you are able to help out a friend or family member.

What should you do when asked to lend money to friends or family?

There is no “right” or objective answer.

However, there are some things you should consider before parting with your hard earned cash.

Questions to consider before you lend money to friends or family

1. What is their situation?

Is this person terribly unmotivated and always abusing the generosity of others to get by? Or, did this person find themselves in poor health and unable to work and provide for their family the way they used to? Circumstances matter.

2. What is your relationship with this person?

Is it a long lost cousin that you haven’t spoken to in 10 years who came out of the word work once they discovered your financial success? Or is it your dear sister or best friends? Do you trust this person? Would you expect them to do the same for you?

3. What is your financial situation?

Can you afford to lend someone money? Is there potential for you to default on your bills or go into debt because you have given away your emergency fund? Will you need to buy a new car soon? Are you planning to have a family? Despite your desire to help out a family member or friend, if lending the money is going to put you in precarious financial situation, you might want to think twice.

4. Are you okay with the worst case scenario?

The worse case scenario being that this person will never pay you back. Is that something you can stomach? What will that do to you relationship with the person who is asking to “borrow” the money. Are you willing to lose an important relationship?

Things to consider if you decide to lend money to friends or family

5. How much money are you willing to loan?

Make sure you only give what you can afford.

6. When do you want to be paid back?

Pick a date and agree upon it.

7. How do you want to be paid back?

Are you okay waiting for a lump sum payment or, do you feel more comfortable setting up some sort of instalment plan?

8. Will you charge interest?

If so, how much?

9. Will you draft a contract?

If want to keep things clear and ensure everyone is on the same page you should consider drafting a contract. Depending on how formal you want it to be, and how much money you are looking to loan, you can find example contracts online or it may be in your best interest to consult a lawyer.

Things you can do to help if you decide NOT to lend money to friends and family

If you have assessed the situation and feel like lending the money is not the right choice/not possible for you at the time, then see if there are other ways you can assist your friend or family member.

10. Help them search for employment.

If they are struggling to find a job, devote some time to help them look for new opportunities. Offer to edit their resume or setup an informational interview with one of your connections.

11. Let them stay with you for a while.

Do you have a spare room or a pull out couch? Maybe you can let your friend or family member bunk with you for a few days, weeks or months, until they are able to get back on their feet. Rent and food are usually two of the biggest expenses for people. By offering a place to stay and food to eat you could be helping them out big time.

BUT, make sure you both establish an understanding of how long the invitation is going to last. You may start to feel a lot less generous if your house guest decided to overstay their welcome.

12. Help them create a financial plan for the future.

If you’re good with money management, help them to develop a financial plan that will help them get back on their feet. Or, if you don’t have the financial knowledge to help them yourself, assist them in finding someone who can.

13. Be there to listen.

Maybe you can’t be there financially but if your friend or family member is going through a difficult time be there to listen and provide advice or words of kindness. If this friend or family member has always been plagued with money issues maybe you can help them to get to the root of the problem…or maybe you can recommend an effective counsellor!

 

I want to hear from you!

What are your thoughts? What would you say if you were asked to lend money to friends or family? Have you ever done it? What was the outcome?

 

References

Post Photo by Evan Kirby on Unsplash