How to Lend Money to Family Members without Going Broke

lend money

It is a well-known fact that lending money to your family members is generally a bad idea as it could lead to a damage of the relationship. However, there are many cases when you have to, at the very least, consider the situation and part with some money. What do you do in such situations to ensure your finances are still protected?

Don’t put your name under the spotlight

They may ask you to be a referee for a loan or to hand over a credit card you got in your name for a while. Do not agree to this. On no account should you put your credit rating in jeopardy for someone else. Even with some excellent banking apps where you can keep tabs on what is spent at any interval, it is not a good idea. Insist on cash only or decline the request.

Don’t lend more than you can afford

It goes without saying. It doesn’t make any financial sense to hand over 50% of your savings in a transaction that will most likely lead to prolonged problems. Since there is a high chance that the money won’t be paid back, it is best to lend what you can afford to forget.

Take note of how the lending will influence your family circle

Lending to a financially irresponsible sibling could lead to their spouses accusing you of enabling bad behaviour. Lending to one family member when you declined another could also mean accusations of favouritism. If you are lending to your nephew, make sure the parents are involved or your own children could take offence.

Know where the money is going

Anyone in genuine need of a loan will have no problems discussing what the money is for, whether they are borrowing from a family member or a high street lender. If the borrower takes offence because you asked questions, they will likely take even bigger offence when it is time to pay back. Take the time to verify any claims as well. Do they need money for certain fees? Make sure the numbers add up.

Discuss terms and set in stone

Do not treat the discussions around lending money to a family member with kid gloves.  Put the amount being loaned, the interest rate (nothing wrong with charging this to keep them on their toes), and the repayment date in writing. Add any late fees. A verbal agreement is not enough. Put it all in writing.

Don’t attempt to dictate how the money is spent

You may unknowingly end up micromanaging the spending after you have handed out the loan. This is a bad idea as it could lead to misunderstandings. They borrower can also pin any outcomes on your interference.

Don’t hesitate to say no

If you are not convinced about lending the money, don’t allow emotions to play a part.  Decline and stand by your decision. You can offer reasons why you can’t help at the moment in question and then elect to give a small cash contribution towards solving the problem.

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