Lending money to family and friends is a bit like walking a tightrope, and it’s very easy for things to go wrong. With the ongoing recession affecting so many people, you might be tempted to lend money to a loved one in hopes of helping them out. While this might sound like a good idea in principle, doing so can be problematic.
The first step in deciding how best to proceed is to find out why your friend or family member is having a difficult time. If they have a history of being responsible with money and are just experiencing a temporary setback, you might consider helping them out. If, on the other hand, they consistently have trouble with money, you should think twice — you could do more harm than good. How?
As hard as it is to admit, some people just aren’t good at handling their finances. They constantly live paycheck-to-paycheck and donâ€™t seem interested in (or able to) change their habits. If you lend them money, you’re jeopardizing your relationship, and you might also wind up enabling their bad spending and non-savings habits.
Thoughts on Lending Money to Family or Friends
- Do not co-sign for a loan! If you do, you’ll be legally responsible for paying off the debt if they do not or cannot pay. How would you feel if you got stuck with your someone else’s debt? This sort of thing can cause tension and resentment, and might even destroy the relationship.
- If you donâ€™t have money to lose, then donâ€™t loan them money! We all have responsibilities of our own, so donâ€™t loan out money that you canâ€™t afford to lose. Make sure you have ample emergency fund in case your family has an emergency of its own.
- Think about giving a small financial gift. If you have the means to give some money, but feel uncomfortable with a loan, then try simply giving a smaller amount. Youâ€™ll feel good about having provided some assistance, and you won’t stress about getting your money back.
- Consider giving something other than money to help. If times are a bit rough, grab some groceries. If youâ€™re afraid of enabling them, offer to help organize a yard sale or something.
- Offer to help them with budgeting. This can be a tricky one, as most people aren’t willing to share their finances. Even so, you can show them how you budget, and maybe share some helpful tips.
- If you end up making a loan, put everything in writing. Decide ahead of time when and how the loan will be paid back (e.g., lump sum or monthly payments), and have both parties sign the agreement. Make a copy and keep the original.
What if You Can’t (or Won’t) Lend Them Money?
If you end up having to say â€˜noâ€™ to a friend or a family member, keep it brief. Explain to them you just canâ€™t loan them the money, but you can offer your support (or a small gift if you can). Just remember, itâ€™s up to you to weigh the options and come up with the right answer for you.