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Should I lend money to my family?

By Sam Instone - September 22, 2017

Our families require (and deserve) our love, time and attention.

But sometimes, they also demand more tangible things.

Perhaps that’s why comedian George Burns famously said:

“happiness is having a large, loving, caring, close-knit family … in another city!”

Lending money with the expectation of it being repaid is awkward…

But because it’s a common situation when it comes to family, I want to address the issue and help you navigate the complexities successfully.

Should you lend money to family or friends?

Generally, I would always caution against lending money to family and friends.

It changes a relationship’s dynamic and introduces stress.

If the terms of a loan are not understood or adhered to, the worst-case scenario is a permanent relationship breakdown.

However, sometimes a request cannot be ignored.

So, here are 3 tips for lending money to family:  

1. Discuss and document everything

Talk to your borrower about the loan’s terms, what will happen if it isn’t repaid, and then write down the parameters of the transaction.

Include the timeframe, the interest rate if relevant, when payments need to commence, and when the loan needs to be paid back.

Just because you know the borrower, don’t treat this transaction any differently than you would any other loan.

If everything is documented, there’s no room for assumptions.

Ask your borrower to sign an acceptance of the terms.

You must consider what will happen if a repayment is missed.

Lending money to family or friends isn’t just a financial transaction, it's an emotional one.

Therefore, this potential negative scenario should be considered by both parties at the outset.

Have an open dialogue about the consequences of non-repayment, because if it occurs, the relationship between you and your borrower will deteriorate.

2. You can say no

Whilst the option of saying no – or yes - may be unpalatable, remember that you really do have a choice.

Just because a loved one is asking for money doesn't mean you have to lend it.

Here’s a suggestion for an inoffensive but decisive way of saying no…

Say you have personal, family or business financial goals that you’re focused on, that you need to stay on track to achieve them, and unfortunately there is absolutely no room, financially speaking, for you to be able to lend any money.

3. Make it a gift instead

Depending on who’s asking, how much they want and how much you can afford, would it be better to make the loan a gift instead?

Financial gifts may be tax-deductible – and they change the transaction from being a potentially negative one, emotionally speaking, to being a purely positive one.

If the person asking for money is potentially going to be a beneficiary from your estate when you die, you could gift them the money now while you’re still very much alive to see them benefit from it.

Advise them that this will be reflected in your will so that there are no arguments in the future.

In conclusion…

Family loans can bring disappointment, embarrassment and conflict…

But if someone you love is in trouble or need, the risks associated with a loan aren’t likely to prevent you from helping them out.

Remember you can say no, but if you choose not to, set and manage expectations.

Agree to written terms and consider alternatives.

Lastly, don’t risk even more stress by failing to discuss the loan with your spouse or partner!

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