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.
Related posts:
subscribe to the 
follow The Debt Hawk on 
{ 6 comments… read them below or add one }
Wow! 43% – That’s higher than what I thought it would be.
I think you’re right that you should probably just give the money and have a loose grip on it if you can afford it.
I think you also need to consider if it is perpetual help or one time help that your family needs.
If it seems to be a persistent problem then giving them money is not going to help them long term as I talked about in my related post on this here: http://bit.ly/6feM6
Jason,
Very good point about whether their money problems are constant or this being a one time event. If they constantly have money problems, there are better ways to help them than to give them more money.
Thanks for leaving a comment!!
43% sounds about right.
Money definitely changes family dynamics and changes it into a relationship of one person being in power over another – which is never good. As you say, the best way to approach these situations is to give the money as a gift with no expectations of being repaid. Otherwise, it can turn into a nasty situation.
Neither a lender nor borrower be, especially to family. It causes nothing but trouble.
@Bible Money Matters – The power transfer is almost immediate when you lend or borrow money. It is amazing how fast it can change your relationships.
@WG Peters – I agree that it is only a measure of last resort.
I think the idea of not expecting to get money back is very nice, but does not always work out in reality.
Case in point: My long-term boyfriend needed to borrow money. No one else would lend it to him. I have substantial student loans that I am working hard to pay off ASAP. I had the money to give to him in the sense that I was able to make my minimum loan payment and loan him the money- but I will need the money back so I can continue to get myself out of debt.
Should someone in debt loan to someone else? Probably not- but because my debt is well-managed and his need was urgent, I did it. Now of course he’s taking his sweet time paying it back – but I still feel he has an obligation to pay me back. I am responsible about my debt, why should I expect any less of him? Why should his needs & wants outweigh mine?
If you borrow money from friends/family and don’t pay it back, it’s ludicrous to place the blame on the lender for expecting it back in the first place- they were acting out of love, and failing to repay only betrays the lender’s love and trust.