When a family member is in a tight spot with money, it’s up to us to help them get back on their feet, but this process can get tricky at times.
Despite being family, disagreements do happen, and it’s particularly problematic if your token of goodwill makes you experience financial issues later on, so make sure you’re prepared to deal with this.
A survey from 2022 found that 42% of the respondents had lost money by loaning it to friends and family and these numbers can only go up if you’re a bit too keen on lending money to just about anyone you may know.
Before going through with some of these loans, you may want to keep on reading and find out what the best way to approach a situation like this is and what you can do if you get stiffed for the money you’ve lent to someone.
Why does it happen
We’ve all been there, and going through a financial crisis can be incredibly stressful, especially if you’ve got no emergency funds to rely on.
Thankfully, most of us have a friend or family member who’s willing to jump in and help us out, and this is usually when an emergency expense pops up or if someone’s credit score is far too low to qualify for a loan.
Even though they’re family, it’s important to set some boundaries when you’re put on the spot like this, and you should first assess if you’re even able to help without putting yourself through financial troubles.
If this is the case, it’s best to explain your current circumstances and direct them to someone else, as being late on your own bill payments for the sake of helping someone else is never good.
However, if you’ve got a steady paycheck and a hefty emergency fund to lean on, this may be no issue for you, and it may not be as difficult to manage as you may have originally thought.
Choose only people you trust
Before going through with a loan, it’s important to consider whether you trust the person enough to return it, and even if you do, how likely they are to be able to return it later on.
Because of this, you should be extremely selective about who you lend money to, and deciding to help out that one cousin who keeps gambling all his possessions away might not be the smartest move.
It’s been found that over a third of all people who lend money to friends and family end up suffering negative consequences from the exchange, whether it’s resentment or hurt feelings when the person shows exactly how little they care about their own financial state.
If you don’t feel comfortable lending money to someone, you should always make it clear to them, and even if you’re met with pushback and arguments such as family needing to stick together, there’s nothing that could justify putting your and your family’s financial security in danger.
You could also consider asking for some collateral that is equivalent or close in value to the loaned amount in case they’re not able to pay it back.
Limit your loans
Offering a family member a loan greater than what you can currently afford is a horrible idea, especially if you’re helping them with an emergency expense.
This can be okay if the person in question has missed a paycheck or simply needs help getting back on their feet, but even then you should weigh how important you believe helping them really is.
Essentially, you should think of the loan as a gift that you may or may not get back, and if you do, make sure that gift isn’t imposing on your own financial well-being.
Of course, you shouldn’t go into an agreement like this with the mindset that you won’t be repaid, as it can be devastating for relationships among family members, so make sure to set some realistic boundaries.
By doing this, you’ll save yourself from taking out a loan of your own later down the line, and you may not run into someone as charitable as you were.
Write it all out on paper
Nothing beats a written agreement, and even if family members assure you that they’ll return your money in due time, it’s best to have it all written out, just to avoid any misunderstandings that may follow.
A simple loan contract is often enough to decide what both of your responsibilities are regarding the loan, and on top of this, it may come in handy if the situation goes south and you’re forced to take it to court.
If push comes to shove, you shouldn’t refrain from suing them over the money they’ve borrowed, but without proper paperwork that you’ve both signed, you won’t have any grounds for the legal recourse you had in mind.
At the very least, make sure to include both parties’ names, the loaning date, minimum monthly payments, and interest rates, although the last one isn’t something that’s commonly found in loan agreements between friends and family.
If you’re loaning a larger amount, a single piece of paper may not be enough, and it’s when you’ll want to employ an attorney to draw up a proper contract.
It’s important to note that interest on loans above $10k is considered to be taxable income, and if you choose not to charge it, you may have to report the loan as a gift if the other party hasn’t repaid it.
Why you shouldn’t do it
The biggest downside to lending money to friends and family is the repercussions that may follow, and hundreds of thousands of relationships were ruined with loaning agreements that left one party with a sour taste in their mouth.
At times, the emotional damage that this may end up causing can feel worse than actually losing the money, and as you already know, a friendship is far more valuable than some green paper with numbers on it.
If you’re determined to help someone out though, be prepared for the possibility of never getting that money back.