The Finance Blogger


Lending to Family Members

Lending to Family MembersOur last post dealt with private loans and private mortgages which also includes lending to family members.  However we thought we would do a specific post about lending to family members. This is often were disagreements occur due to poor documentation and misunderstandings around the personal loan. They can sometimes can affect relationships for many years. If family members do not communicate and work to solve the problems in a constructive manner, they may lose a great deal of money.

Lending to Family Members

They may be small loans or they may be larger loans and mortgages. Regardless of what they are there is always room for misinterpretation which causes conflict.

If you really do not want to be lending money to family members, then don’t but offer to help them get a loan from a bank. You have to remember that it is not just a loan they want, but favorable terms as well that they are after. Low or nil interest charges, forgiven loans perhaps, low payments and looking the other way if they miss a payment. A bank will not provide them with this kind of leeway, so if you are concerned about any of these issues or just do not want to be in the business of lending money, then don’t.  Help them get a loan, but do not co-sign for the loan or you could end up paying the loan off yourself if your family member walks away from the loan.

How Should You Handle Requests for Loans

There are many ways to handle these requests depending on the size of the loan. Large loans should be steered towards the banks and lending institutions. Small loans of a few dollars or a few hundred dollars could be worked off through baby sitting, house work or yard work if you need this sort of thing done.  Again make sure that you both understand the agreement, how much work to be done for how long etc to make sure there are no misunderstandings. These types of loans often occur between teenagers and their parents.

You might wonder why loan your teenager the money? Just give it to them. BY making a loan and asking for it to be repaid, you are actually helping to teach them about managing money and meeting commitments which will be valuable in the future. Lending money to family members can be instructive as well. This is an opportunity to teach them about money and have conversations about saving and paying their debts.

Use the Opportunity to Teach Them About Managing Money

You might even ask them to take a course in managing money and your finances. We simply do not get enough of this in our schools and most people have to learn by trial and error. Make the loan on condition that they take one of these finance courses.

Sometimes in order for you to make a loan, you may have to sell an investment which means you lose money. If they are willing to pay you what you will lose, then it might be good for both of you, however in many cases the family member will not pursue the matter further.

We all want to help our family members out, however if it is going to cause problems with relationships, then you are probably better not to go ahead with lending money to your family member. If you do, document everything so there are not misunderstandings. Refer to our previous post for a list of items to cover.

If you are being pressed to lend to a family member, leave us a comment on how you are handling the situation. Our readers may find that they can use your approach in their own lives. Comments are welcome. For more information about financial mistakes, click here.

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