6 Tips for Loaning Money to Family

Have you ever loaned anybody money? I don’t mean the $10 your coworker asked for at lunch the other day because he didn’t have cash. I’m talking about the $500 your cousin wants to borrow because he’s short on rent. Or the $10,000 your brother needs for his business. Whether it’s $500 or $10,000, it’s a good idea to keep the following tips for loaning money to family in mind before pulling out your checkbook.

1. Don’t let it ruin your relationship.
Money should never come between you and a loved one. Once you have decided to lend your family member the money, don’t mention it again until the time comes for them to repay you. Don’t ask them about their financial situation every time you see them. It will only make things awkward and uncomfortable for the both of you. That being said, keep the lines of communication open. If your borrower uses the money as a downpayment on a new sports car when he told you the money was to pay rent, speak up. Don’t keep these things in. Resentment ruins even the best relationships.

2. Be flexible, yet firm.
Before agreeing to a loan, remember that circumstances can change. Just because your family member promises to pay you back in two months doesn’t mean that will definitely happen. What if their car breaks down? Or they suddenly lose their job? You have to be okay with these delays before making a loan. At the same time, your loved one needs to know that you need this money back. Like rubber bands, no matter how flexible they are, you know what happens when they are stretched too thin.

3. Get it in writing.
You don’t want the IRS to hit you with a gift tax. Make sure you have a contract written up that states the amount of the loan, interest rate (if any), when the loan is to be repaid, etc.

4. Take a look at your financial situation.
Make sure you are in a good place, financially, before agreeing to lend a loved one money. If making a loan will set you back in your financial goals, decide whether it would be worth it. Remember, it’s okay to say no.

5. Lend what you are okay with not getting back.
This one might sound crazy, but think about it. There is a chance that you may not get your money back. Some people (myself included) have a hard time saying no. But if you asked yourself “would I be okay with not getting this money back?” each time someone asked for a loan, it might make it easier to politely decline. If the answer is “yes, I would be okay with never seeing this money again”, then you have taken the stress out of the relationship.

6. Consider who is asking.
Sometimes, it can be hard saying no to the people we love. Making a loan to a loved one who is usually unreliable could be disastrous for your relationship. On the other hand, lending money to a responsible family member will make things easier for the both of you. Paying you back will be one of their top priorities.

Last year I asked my uncle for a loan to start a real estate business. He generously agreed. Weeks later, my husband and I found out we would be moving to NY for a year. That meant our real estate venture would have to be put on hold until we knew exactly where we would be settling down. I was disappointed at first, but now I see that it was a blessing in disguise. Starting a business from scratch would have been beyond stressful, and knowing that I was in this new business with my uncle’s money would have tripled the stress for me.

Loaning money to family (or close friends) can be awkward. These six tips can make the task a little less uncomfortable for you and your family. Just remember, don’t let money ruin your relationships!

Have you ever loaned money to family? How did it work out for you?

Did you like this post? If you did, I would love for you to share it!

Linking up with The Thrifty Couple and Living Well Spending Less.