The True Cost Of Lending Money To Family

By on December 14, 2012 No Comments

We all know that blood is thicker than water and that family comes first.  So when a close family member tells you they’re in a bind and could really use some help, you should do whatever you can to help them, right?

Most of us would lend money to family members with the best intentions, and the recipient would accept the loan with equally noble intentions: to pay it back as soon as possible.  But life gets in the way, things happen, and some people just don’t take a family loan as serious as one from a bank.

The sad truth is that borrowing from family can be the most costly loan of all – ruining lifelong relationships over the tiniest amounts of money.

What To Consider When Lending Money To Family

You know that conversations about money are complicated.  Most of us are embarrassed to even bring it up, so the idea of talking about payback terms and deadlines might seem cold, heartless, and unfair.  Ignoring these issues, however, opens the door to a lack of payment, resentment, anger, and lies.

A Loan Or A Gift?

The easiest and safest way to help a family member is to actually gift them the money.  The first rule of lending is never lend what you’re not prepared to lose, so why not just truly help this person out and give them the money.

The only way to make this work is to truly give it to them in your heart.  If you hand over the money and you see them next week with a new cell phone, you have to accept that it’s their money and you don’t get a say.

Payback Terms

A loan is not free money and should not be accepted as such.  You have to see arranging payback terms as a means of saving the relationship, not of enforcing strict policies like an unforgiving bank.  You just want to be on the same page.

Some options for payback could be:

– Paid off in monthly installments for the next 12 months interest free
– Full payment to be paid within 6 months with no schedule
– Repayment of $200 per month until the balance is paid off

You want to avoid inflicting further financial hardships on the borrower, but you also want them to take the loan seriously.

Don’t Take The Loan For Granted

The LAST thing you want is for the borrower to assume lax payback terms because it’s family.  Family get-togethers will be less fun if someone is avoiding eye-contact with you because they’re feeling guilty about the money.

Are You Just Enabling?

We all know people who are constantly a month late on their bills.  Whether it’s ‘bad luck’, bad habits, or whatever else, some people just never seem to be on track.  If your relative is one of these people, you really need to consider if your giving or lending them money is helping them in the best way.

Are you just prolonging the inevitable for them?  Is there a better way you could help them?  One way to do this might be to provide a loan conditional on them doing something to help themselves.  Maybe that means taking a course on financial management, applying to some jobs, or whatever else you think could help.

Obviously these situations are delicate, and the specifics are out of the scope of this article, but if you have the opportunity to truly make a lasting change in a family member’s life, it’s worth thinking about rather than just writing a cheque to get them out of their most immediate jam.

Remember, Family First

At the end of the day, having a healthy family is probably more important than the money.  By entering the situation openly and honestly you have the greatest chance of both helping the person out and keeping your family strong.


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