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Rules for Lending Money to Friends and Family

It’s the call you dread. Mom, I can’t make rent again, can I have some money? Hey best friend, I have a great business idea and this time it will work out. Can you invest? Auntie and Uncle, why can’t you give us the down payment for a house?
Credit: Pixabay

It is unavoidable. At some point, friends and family will ask for money and when they do, how should you respond?

You Are Under No Obligation

First, realize that you are not obligated to lend money. A firm no (and no is a complete sentence, you don’t have to explain yourself) is fine to say. Be especially cautious if the lender uses emotional blackmail, saying things like, “you owe me because you were a bad parent.” Or, “You gave money to my sister, why not to me?” Be equally firm in your no if the loan is to enable gambling or other bad habits.

If you don’t want to lend money to your friend or family member for any reason, say no. If they insist, point them towards their local bank for a short-term loan, HELOC or credit card. If their credit is so unstable that they cannot borrow from traditional lending institutions, suggest Cashco, who specifically works with the underbanked or those with poor credit scores. Cashco is very upfront about their interest fees and has flexible programs to meet a variety of situations. Cashco also supports financial literacy in schools and through their own programming.

Never Lend More than You Can Lose

Tapping your retirement fund, cashing out your pension or draining your savings are not good ideas no matter how much you love your friend or family member. Never give out a sum that compromises your own financial well-being in the short or long-term.

If you Do Lend, Have a Legal Contract and Collateral

Lending a large sum of money is a transaction that can be legally supported. If investing in a business or product, for example, have a contract that states when you will be paid pack, how much of a share you have in the product, etc. Have a lawyer or advisor write or review the contract and have it notarized. You can also ask for collateral. Lending money for an income property? Make sure your name is also on the title until you recoup your investment.

Don’t Let the Loan Impact the Relationship

The best way to avoid a loan harming your relationship is to have clear boundaries from the very start. If you say no and that is not respected, then you are not being respected – especially since there are a variety of options for all credit score ranges. Ensure the recipient knows if the money is a gift or a loan and if it is a loan, protect yourself with legally and/or with collateral. And always remember, never lend a sum that compromises you financially in the short or long-term.

Special Note: What if the Loan is Due to a Scam?

When a loved one falls for a romance, investment or gift card scam, they may come to you out of fear and embarrassment. The situation is very unfortunate but again, you do not have to lend money to help them clear their situation. In fact, if you do, you can help perpetuate the scam. Making it “go away” sets up the scammer to target someone else. If your loved one is the victim of a scam, report it. Help them understand that there is no need to feel embarrassed and empower them to take steps to stop the scammer from contacting others.

This story is brought to you by Great West Media Content Studio. It is not written by and does not necessarily reflect the views of the editorial staff.

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