I wanted to share with you a great article that I just read on CNN Money on how to lend money to family members and share my 5 principles for lending money to family members.  This is one of the trickiest personal finance topics that people face because these transactions are not just about money.

These transactions are about so much more than money.  They are involve intense feelings because these are the people you love the most.  You want to help them - in fact you might feel obligated to help.

In the CNN Money article above, one of the most common lending money to family members situations is discussed - borrowing money from parents for a house with a lower interest rate than the children could get with a traditional home mortgage loan.  Often this type of transaction can be a win-win for both the parents and the children.  The parents can get a higher interest rate than they get in a savings account and the children get a lower interest rate.  But, beware.  While on paper it might be good for both borrower and lender, it can destroy a great relationship.

There is nothing more important than the relationship itself.

Whenever you borrow money or lend money to family members you have to keep that sentence in your head at all times.  This is not a pure financial play.  This is about love.  It is one thing to have a bank foreclose on your house, but it is an entirely different thing to ruin you family relationship over defaulting on the loan.

So, let me share with you 5 extremely important principles when lending money to family members.

5 Principles to Think About Before Lending Money To Family or Borrowing Money From Family

1.     Always give a gift if you can afford it - If you can afford to give a gift instead of a loan, do it.  Having family members owing you money or owing money to family members can fundamentally change relationships.  If you can afford to give a gift, don't put your relationship at risk.  It is not worth the money.

2.     Mentally prepare to not get paid back - According to the CNN article above, 43% of people who lent money to family members were not paid back in full.  Wow, 43%!!  How do you think this affected their relationships?  The best way to not allow your relationship to be adversely affected is to treat the loan in you mind as a gift.  Don't expect to get paid back.  Remember, you are only lending the money in the first place because of your love.  Don't destroy this love over money.

3.      Make sure your family members are okay with the loan - Communication, communication, communication.  Before lending money call a family meeting to discuss it.  Make sure that your spouse is on board.  You don't want to ruin their relationship with your family members.  More importantly, you don't want this loan to negatively affect your marriage.  Another important part of this communication is putting the loan terms in writing.  The purpose of this writing is to make sure that everyone clearly understands the loan terms and the repayment terms.

4.     Communicate to your loved one that you view the loan as a gift - This one seems really weird because you are structuring the transaction as a loan, but remember principle number 2 above.  Don't lend money to family with an expectation of being repaid.  Why should you tell your loved one this?  A loan to a family member does not just affect the lender's feelings toward the borrower, it also fundamentally changes the borrower's relationship with the lender.  You don't want your loved one to pull away from your relationship because of this loan.  You don't want them worried about hurting you or resentful of owing you money.

5.    Don't lend money you can't afford - If you can't afford to lose the money, don't lend it.  While your loved one needs a loan, you can't lend money that you can't afford.  If you lose this money, I don't think there is any way that this loan will not hurt your relationship with your family member.  They will feel guilty for hurting you and you will resent them for not paying you back.  So, give what you can afford and no more.

What do you think about lending money to family members?  Please share your thoughts in the comments section below.

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