People are often advised not to lend money to family or friends, and if you must you should give it not expecting to get it back. In fact, studies have shown that almost half of the time, things end badly and without repayment. In other words, agreeing to lend money to a family member has almost a 50 percent chance of causing you to lose both your money and your relationship. Yet, the majority of us will go against this advice and go out on a financial limb to be there for our loved ones when they need us.
According to Bankrate, 60 percent of people have lent money to a family member; 21 percent have cosigned for a loan or rental; and 17 percent have lent their credit card to a loved one. Of those people, 35 percent reported a negative outcome, which included failure to repay, a damaged credit score, or a strained relationship. While we all want to be there for our loved ones in their time of need, it’s essential to put a limit on how far you’re willing to go for a financially irresponsible relative.
“Financial boundaries are very important when it comes to family. When you’ve been supported by them, the need to give back can be extremely strong,” Zaneilia Harris, CFP®, President, and Advisor at Harris & Harris Wealth Management told MadameNoire. “However, there need to be set perimeters on what that looks like.”
Don’t lend what you can’t afford to lose
“Go in with eyes wide open. Try to avoid damaging the relationship at all costs,” said Ted Rossman, Industry Analyst for CreditCards.com. “Don’t lend more than you can afford to lose. If possible, treat it as a gift and don’t expect it back, because that can lead to lasting consequences — like an uncomfortable Thanksgiving dinner with your lender and second-guessing a relative who just bought an expensive TV or went on a lavish vacation but owes you money.”
Predetermine how much you’re willing to lend
“When reviewing your finances, determine a specific amount you will provide to family either on a regular or one-time basis, For example, it could be you plan to give $250/month to your Mom for her financial support over the years or you can voluntarily pay for one of her monthly expenses,” Harris advised. “Siblings can also request money from time to time. Determine a specific amount you are willing to give. It may be you will give no more than $300 for any one request or not give any more than $500 for the year. Once the amount has been maxed, you are not able to provide any additional monetary support.”
Know when to say no and how to say it
“Once you’ve decided what you are willing to give to support family, that is the limit. If someone asks you for money beyond that set amount, your response can be no, I don’t have it to give,” said Harris. “This can help remove the guilt of saying no. Over time, you will stop feeling guilt. Ultimately, you have to protect your finances from your family. Otherwise, it causes problems with you achieving your goals or with your spouse,” Harris added.
Draw up a contract
“A contract should always be written up with terms that are beneficial to both parties,” said Ande Frazier, CEO of MyWorth. “There should be collateral up to take if payments aren’t made. It’s vital to establish these boundaries so that things don’t get messy. A quick contract/agreement is an important step in ensuring that people don’t risk their relationships with their loved ones.”
Lend with interest
“If a person is turning to an inter-family loan, they need to make sure that they offer something of value to the person they are loaning from, For example, if someone is currently earning 1.9% in interest on their money in a money market account, they should be offered at least 2% or 3% in interest on their loan,” Frazier advised.
While it may be hard to stick to your guns — and these best practices — when it comes to your loved ones. In the end, doing so will not only help you sleep better at night, it will prevent any bitterness that can potentially come with letting a family member borrow money.