Eventually, it happens to almost everyone. You are approached by a family member seeking financial help. If the amount is small and this is a first request, you will certainly feel compelled to fulfill their request if you have the resources available.
However, it is good to be aware of the pitfalls of mixing relatives and your personal finances. Having been down this road many times over the years, I believe I have some insights into how to avoid most of the headaches. A few straightforward guidelines should help you navigate through this hazardous zone.
Say no if you are uncomfortable.
No rule says you have to loan money to anybody. You have the right to refuse for no reason. You may feel guilty for saying no, but it will pass. More than likely, you will eventually be glad you said no. The good news is that you can later change your mind if a compelling reason arises.
Be willing to view it as a gift and not a loan.
One of the big problems with loaning anyone money is that they frequently are in trouble because they have already mishandled previous funds. The chances of being repaid according to their assurances is often near zero. When the person does not pay you back, it can damage what may have been a decent or even good relationship.
If you view it as a gift and getting paid back as a bonus, you will have a lot less trouble maintaining a positive relationship with a relative. Somewhere along the line you can even tell the person that the loan has been forgiven. This will be big positive for any relationship.
If the amount is large, set up a written agreement.
Considering the loan as a gift works best if the amount does not create financial hardships for you. When a relative asks for an amount that could intrude on your lifestyle, you will want to get repaid. Draw up some simple loan agreements that specify the amount loaned, the interest rate if there is one, and the repayment terms. Both of you sign the agreement. Keep the time frame as short as you can.
Lend the least amount possible.
It is common for people to want to borrow extra “just in case.” Offer to lend only the minimum. If you choose, you can assure your relative that you are willing to discuss the extra amount later if it becomes clearly necessary.
Know why they need the money.
Banks ask what the purpose of the loan will be. You should, too. This way, you can make sure that it is being used for a purpose that you agree with. Certainly, it is a bad plan to lend money to gamble, by drugs, or other illegal and immoral activities. You may want to avoid lending the money for frivolous reasons like a big party for their friends.
Purchase the item or pay the debt directly rather than giving money when you can.
Because people may lie, the reason for the loan may not be what it will actually be used for. If you deliver the money directly to the recipient, it will give you better control of how the loan is used. Again, banks send the car loan money directly to the dealer. Learn from the wisdom in this approach.
Avoid hounding the relative for the money.
Since this loan is about both helping a relative and keeping a relationship, try to be soft about collections. Obviously, if you have drained your funds too deeply to give the loan, you may feel pressure to collect. Find gentle ways to recover the funds. You may have to offer to help your relative earn more income or assist the person in managing personal finances. Try to be helpful and compassionate as much as possible.
Do not lend money a second time to relatives who did not pay you back before.
If someone was successful in getting you to lend money once, he or she may decide to try it again. This is fine if the first loan was repaid. Unless you choose to be a cash cow for a relative, you will be better off to decline future requests from those who did not repay you.