We all have heard horror stories of family members that come to blows over money. Tight-knit families that spent Sunday afternoons together are no longer on speaking terms. Their children are no longer allowed to grow-up with cousins because of the bad blood between their parents.
As a personal finance coach and lover of our community’s collective financial empowerment, I wonder if situations like these could be avoided. After working with several clients and reflecting on the times that I’ve had to help a family member out, my answer to that question is a resounding…maybe.
Here’s what I mean.
I think the experience of lending money to a family member requires some real thought.
Not all family members deserve your generosity, but some do. If you are in a situation where you’ve been asked to fill the collection plate, consider the following when making your decision.
Is the person chronically financial irresponsible?
If the answer is yes, then you shouldn’t feel guilty about saying no to those family members that rely on the deep pockets of other family members to bail them out. That goes the same for family members with a sense of entitlement, who expect a handout because they are family.
On the other hand, if one of your consistently financially responsible family members encounters a dry season and reaches out for support, then you may consider doing so as a one-time service.
Do they have a clear debt repayment strategy?
One problem with family members who borrow is they don’t fully understand the concept of borrowing. When you borrow, it’s supposed to be paid back. I’ve seen family members think of all the reasons that they need money. Their appeals to emotion and reason are sound.
Their bullet points for repayment, though? Not so much.
If family members are brave enough to broach the topic of borrowing, then they need to be equally as brave about stating the specifics of how you will get your money back.
If not, then you will have to be brave for them. Don’t be afraid to ask, “When will you repay 50% of the loan?” or “What will be my recourse if you don’t repay it?”
Will you be homeless and hungry without the money?
If you have to raid your 401k to lend money, then it’s important for you to see that you ain’t got it. That’s the same for any money that is to be used in the next 2-3 years.
Are you forgoing your college tuition, necessary car repayments, or the purchase of a home in order to help a family member out?
Then you ain’t got it.
If you can lend the money and still meet your current and mid-level financial goals, then you can consider whether or not you will open up your piggy bank.
Are they willing to sign a contract?
If a family member gets salty about signing a contract, then they are probably not the best candidate for your largesse. Again, when borrowing, you can’t forget about the repay. This is where feelings of entitlement really show-up.
“But I’m your cousin…” is not enough of a reason as to why they shouldn’t sign a contract. In fact, contracts protect the borrower as much as the lender from abuse, depending on the conditions of the contracts, assuming that they are co-created.
BMWK- What are your beliefs about lending money to family members? What other tips should we include?