Lending Money to Family Members: Worth the Risk?

When it came to giving out advice, there were two things that my momma always said. One, never go to bed mad and two, never lend money you can’t live without. Of course, she never really told me how to deal with the guilt that came along with having to say no, but I soon figured out that having a guilty conscious was a lot less burdensome than having an empty bank account.

Dealing with relatives who are constantly looking to you to bridge the gap between their last paychecks and the end of the month can be tough. There is a lot of guilt placed on you if you choose to say no. I, unfortunately, know this feeling well.

Working in the financial industry, I know the ins and outs of consumer lending. I also know how tough it can be to get a loan if you’ve had some credit issues. So, instead of watching my family members throw good money after bad using payday lenders or high-interest personal loans, I chose to help wherever I could.

Lending Money to Family MembersBut, I recall a certain instance where a close cousin of mine asked to borrow $1,000, claiming that her husband, who had been chronically unemployed for six months, had finally found a job and needed the money to purchase a few hand tools and work clothes. She had borrowed smaller amounts from me in the past and though I felt a little nervous about lending her so much cash, I was happy to be in a position to help her.

We sat down and created a payment schedule she felt sure she could keep and I gave her the money. One month passed by without payment and then two. I began to call her, asking her to repay the money she’s borrowed, but she would duck my calls and my messages. When I did catch her at my grandmother’s house during Thanksgiving, I got a lot of attitude and a million excuses as to why she couldn’t pay. Six months later, I gave up and wrote the loan off as a loss. My cousin and I haven’t spoken since.

So, what do you do when a relative asks for money? How about when it becomes habit? How do you avoid the guilt of saying no to family members in need?

1. Start Saying No

While this step won’t be easy and will most certainly not make you popular, the sooner you stop loaning money, the sooner they will stop asking for it. For many people, it’s much simpler to borrow cash from a family member than to change their spending habits.

And while this is not necessarily the wrong thing to do for an emergency situation, it simply isn’t a long term solution to a much deeper financial situation. You have to make asking you for money uncomfortable in order to make it stop.

2. Provide Alternatives

Instead of loaning money that you will likely never see again, offer alternatives instead. Offer suggestions as to how to chronic borrower can supplement their income including offering to “hire” them to give them an opportunity to earn the money rather than lending or giving it away. You could also help them by offering your services. You could babysit, cook, or offer hand-me-downs in order to fulfill a need instead of loaning money.

Editor’s note: another solution might be for your family member to submit a loan request with a peer lending site. You could then help fund their loan and only take on a portion of the risk.

3. Procrastinate

When a relative asks for money, don’t say yes right away. Even if you have the means to lend the money, taking a few days before offering the loan gives the borrower the time to see if he or she can find an alternative method to address the situation. By simply saying, “Let me think about it”, you give yourself a few days to evaluate the loan request and force the borrower to evaluate the criticality of his situation. And, while this tactic may be less than effective with already established moochers, it may be enough to stop someone who has never borrowed from you before from becoming one.

4. Don’t Borrow Money From Family

It is important for you to set a good example. Simply put, if you don’t want family members borrowing from you, don’t borrow from them. Borrowing is a learned behavior and many family members firmly believe in reciprocal generosity, meaning that if you borrowed from Cousin Joe last year, he will remember it when he needs to borrow money in the future.

If you do decide to loan a relative money, never lend more money than you can afford to lose. You should draw up a contract between you in order to formalize the loan and create a legal recourse should you not receive repayment. And, last but not least, be prepared to accept the fact that your relationship with your relative will change after money has exchanged hands.

Have you ever loaned or borrowed from family? What was the experience like?

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  1. Leszek Cyfer says

    Don’t remember the title, but this reminds me of a movie (there was DeNiro in it) where young boy who can’t get his money back from his coleague gets his advice from a gangster:
    – “Do you like him?”
    – “No”
    – “Then for a small price you got rid of the sucker”

    Its harsh to say it, but some family members are pain in posterior. Agreeing to lend them some money is a way of sorts of getting rid of them.

  2. Recently “loaned” my brother $700 – he really was in dire need & making every other effort he could. It’s helped him a lot. When I loaned it to him It was really a “gift” from my perspective. This relieves any pressure on our relationship. If he pays it back that’s great but if he doesn’t in my mind it was already money I spent. I would not do this on a regular basis and any decision to lend or give should always be made in the context of the individual & relationship.

  3. Chris Denton says

    I counsel my clients to NEVER loan money to friends, family, or anyone you have a personal relationship with. It is a recipe for disaster, as either you won’t get paid, or the person that paid you will feel like you are taking advantage of them, even when you are doing them a favor. Now, if you have the extra money and a friend is in need, fine, give them the money, but I always say, “You don’t have to pay me back, and I don’t want to hear another word about it.” That is the only way to go.

  4. My wife and I lent money to her son (my step son). The problem was it was like throwing bread out for a bird. That bird told all the birds. The next thing we knew we were being hit up for money from other children AND my wife’s parents! Then when we said no things got weird. We should have followed your 2 or 3 tip and provided other ideas or alternatives for my step son to get money.