You’ve probably heard the saying, “friends and money don’t mix.” And you’ve also probably heard, “there’s always an exception to the rule.” Both statements could apply when you’re asked to lend money to a loved one. Before you hand over the cash, learn what’s at stake when you lend money.
Two questions to consider
Before agreeing to loan a friend or family member money, ask yourself:
- Can I afford to make a loan without endangering my financial situation?
- Will our relationship survive if the money doesn’t get paid back?
Your simple “yes” or “no” answers to these questions can help you decide if handing over your money is a good or bad idea.
Set your boundaries in advance
Member Chanyne C. recalled how early in her marriage, she and her husband Craig asked themselves the same questions. From their answers, they decided it wouldn’t be wise to lend money to friends and family.
“When asked for help, we simply said we didn’t have it,” Chanyne explained. “We said this because sometimes we didn’t have it, but primarily because we knew lending money does ruin friendships and relationships with loved ones.”
Just as important, Chanyne said lending money goes against their financial values.
“My husband and I have worked very hard for what we have, and it’s all we have. So, we can’t put ourselves in the position where we [may] lose it,” she said.
Chanyne said she and Craig talk about money-lending all the time with their daughter, Aaliyah.
“That way when she’s with her college friends who may want to borrow money she knows how to handle the situation,” said Chanyne. “We continue to impress upon her that it’s [OK] to say, ‘I don’t have it or I just can’t.’”
Will you make an exception to your rule?
If you’re asked for $500 to cover a costly prescription or major car repair, it may be hard to say “no” during your loved one’s time of need. If you can help, it’s OK to say “yes.” But make it clear why you’re helping now and what, if anything, you expect in return.
A few years ago, Chanyne and Craig made an exception to their no-lending rule. They joined extended family in a “love collection” for a family member in need.
“We made it known upfront it was what we said it was — a donation. It’s a love gesture,” said Chanyne. The couple made it clear the donation was a one-time exception.
“We didn’t want to get into the habit of whenever someone gets into a situation, the money tree is always shaking,” she said.
Three ways to protect yourself
- Don’t lend more than you can afford to lose. Take a careful look at your finances first. Ensure your commitments aren’t negatively affected if you help someone else.
- Learn all the details. Find out all you can about the loan’s purpose. Don’t provide the money until you’ve verified the details.
- Draft a written contract if repayment is expected. It should outline the terms for repayment, whether interest will be charged and how much. Also, document the time frame in which the money will be repaid and the consequences for not doing so. If you’re lending a significant amount of money, it may be worth talking to a lawyer to draft a more formal contract.
Look for ways you can help without lending money
Today, Chanyne and Craig still prefer not to lend money. Instead, they look for other ways to help. This way, they believe, the borrower may not need to turn to high-interest loans or payday lenders.
“You can say ‘yes’ and put yourself in a bad situation. Or you can say 'no' and maybe put the loved one in a bad situation. So, I look for what else can I do to help, besides lending money,” said Chanyne.
First, she suggests applying for a Signature Personal Loan from the Credit Union to help meet immediate cash needs. For long-term help with managing money, she suggests showing the person how you manage your finances. She also suggests providing him with information about personal finance. Visiting the Credit Union where members can receive no-cost, professional financial counseling or attending a money management workshop are additional options she recommends.
Find your personal balance
When it comes to lending money, use your head and your heart. It’s not only a sum of cash on the line. Your personal relationship is also at stake. Weigh all the factors before you decide how to help.
The advice provided is for informational purposes only. Contact your financial advisor for additional guidance. This article originally appeared in July 2017.