Money is known as the universal language, with an ability to break down barriers and build bonds. But when a loved one asks to borrow money, it can also quickly be a source of bad blood.
Maybe your brother just got his first apartment and is asking for help with monthly bills. Or your best friend needs help financing his startup. You want to lend money without hesitation, but a small part of you worries you won’t get it back. Even worse, what if lending money leads to a devastating fight?
Being able to discuss finances openly and honestly with friends and family is an important part of a trusting relationship — especially if someone is in need. But doing so can be daunting (or even embarrassing). Taking the right approach (and following these do’s and don’ts) will promote healthy financial dialogue and allow everyone involved to feel more comfortable — and confident — about the situation.
Take a formal approach.
When lending money to a loved one, it’s important to treat the transaction as if it were with a stranger. Of course this will feel odd and unnecessary, but it’s the best way to establish appropriate boundaries. When you set concrete expectations (around on-time payments, etc.), you increase the chance that you’ll be repaid in full and your relationship will remain harmonious.
Get the details.
Once the ask has been made from one of your loved ones, you should find out what the loaned funds will be used for. It may seem invasive, but if you’re lending money, you deserve to know what it’s going towards. If you inquire and the person becomes defensive and unable to offer any details, it could be a red flag, and you should give the request some serious thought. (If they have good intentions, it’s likely they’ll be open to sharing how they plan to use the money.) Ask questions and make sure you understand the situation before making a decision.
Layout the specifics.
While you might not need to write a lengthy contract full of fine print and legalese, it’s important to lay out the specifics of the agreement when you loan money. The terms are up to you. Are you going to charge interest? Late fees? Have a regular payment schedule? The more specific, the better. And while it may feel overly formal, a written agreement is something you might want to consider. Should the worst happen and legal action ever become necessary, a signed contract will protect you more than some casual discourse followed by the ol’ spit shake.
Once you’ve given the loan, it’s time to distance yourself. Don’t micromanage the person’s spending or offer suggestions about other financial situations in their life. If you do, you could drive a wedge in the relationship. Let go, take a deep breath, and trust the person.
Don’t overlook all potential outcomes.
This usually goes without saying, but it’s important to emphasize. Anytime you loan money, it’s important to think about what could go wrong: awkward encounters, broken trust, a loss of money, or a relationship that’s forever damaged. Of course, you hope a family member or friend will do everything in their power to pay you back. But sometimes life doesn’t work out as planned. Your sister could come up short, for example, or a cousin might take twice as long as planned to pay you back. Ask yourself if you’d be okay with losing some money. If not, it may be necessary to rethink giving the loan in the first place.
Don’t loan more than you can afford.
Just like in gambling, you shouldn’t go to the casino and bet your net worth on a single game of blackjack. The same applies to lending money to a loved one. Take a close look at your personal finances and determine if you can reasonably afford to lend the money. Consider your monthly budget, and ensure that your emergency fund can cover any unexpected expenses that you might face during the time you will be lending the money. Remember, there’s always the possibility that you may not get all your money back. If you don’t, will it put you at financial risk? Would you be unable to pay your bills? Would it damage your credit? Would you yourself need to ask for a loan?
It can be a tricky situation to navigate when a loved one asks to borrow money from you. But it’s important to keep in mind, if someone gets to the point of asking you for financial help, they probably really need it. Open communication and setting realistic expectations can help make this financial transaction more transparent and comfortable for both you and the borrower. And what could be better than helping your loved one out when they need it the most?