Harris-Courage & Grady, PLLC
Be Smart When Lending Money to Relatives
It’s the season of giving, and you may find yourself being asked to lend money to family or friends who are going through financial difficulties. Before you decide to lend money, take time to think about it. Relationships are more important than money, and you want to ensure that a hasty loan doesn’t ruin your relationship.
- First, review your own financial situation. You don’t want to lend money that you need for something else. It’s not going to help you or your relative if the loan puts you into debt.
- Encourage money skills. It doesn’t help your relative if you turn them into a perpetual borrower. If the relative has frequent money problems, it might be more beneficial for you to help them develop a budget instead of lending them cash.
- Find other ways to help. Sometimes lending money isn’t the best way you could help. Could you provide childcare, a ride to a job interview, dinner once a week? Think about the person’s situation and needs, and your own abilities to help.
- Do not co-sign. Co-signing for a loan is a tremendous risk. If you co-sign for a loan, you will be required to repay it if your relative becomes unable to. We see many people file bankruptcy who have co-signed loans for relatives and then became obligated to repay them, only to find it wasn’t within their budget to do it. It’s better to just say no. In addition, if the relative makes late payments, your credit score will be damaged.
If you determine that a loan is the best way to help your relative, and you’re in a position to do it, then follow these steps:
- Write it down. There are many loan templates available online. Include the amount of the loan, when and how it needs to be repaid, and the interest that will be charged.
- Provide receipts. Make sure to have a copy for you and a copy for your relative. This way, you will both know exactly how much has been paid and how much of the balance remains.
- Consider the what-ifs. What if your relative doesn’t repay you? What will you do then? You should have a plan for what you will do if you don’t get your money back, to preserve both your peace of mind and your relationship.
Be careful when lending money to relatives and friends. You want to preserve your relationships with the people you love. The best way to help your relatives with a loan is to do it thoughtfully and carefully.