Your brother needs to borrow money to pay the mortgage on a house he could have never afforded in the first place. Your parents’ 401k has been decimated, and they need a little help. Your sister is drowning in credit card debt, and it is up to you to throw her a lifeline.
Commercial lenders are making it harder to borrow money; the job market is shrinking, and nest eggs and emergency funds have been sapped by sinking stock prices. So naturally, people are turning to family and friends to help them through the troubled economy.
Family lending is typically done out of a sense of duty or obligation. These transactions are as much emotional as they are financial, and they rarely end well. We have all been conditioned to “take care of our own,” but here are five things to consider before you open your wallet or your checkbook for a loved one.
1.) Look at your financial situation. If you’re struggling to make ends meet and don’t have at least a six-month emergency fund of your own, you can’t even afford to think about lending anybody money. You should also never tap into money earmarked for retirement and education savings. If your friend or relative does not understand this…
2.) Don’t be an enabler. If the person asking you for money is unwilling to talk about living beyond their means and does not seem genuinely interested in creating a spending plan, don’t lend them money. If you do, you’re being an enabler, not a friend. If they are not overhauling their financial habits, your money will only land them in more financial trouble down the road.
3.) Know yourself. Many financial planners tell their clients to “Just say no,” but you have to decide how well you will be able to live with your decision. How would you really feel if you didn’t help your parents when they needed it? Are there things you can do besides giving them money, like helping them find a financial planner and create a budget, etc.? What can you really live with?
4.) Be realistic. If you decide to give your relatives money, realize that you are unlikely to get it back. Think of it as a gift and talk to your accountant about the IRS codes for gift giving.
5.) Remember it’s not just your decision because it’s not just your money. Loaning money that you may not get back affects your spouse and children, too. Make sure that you discuss this with them before you make any decisions. Discuss the impact on your family budget, the impact on the situation and how the loan will make everyone feel about the family member or friend who is asking. Tensions often fester, so it is imperative to really find out how everybody feels. Decide together. In the end, you will be glad you are not solely responsible for the outcome.
Once you’ve made your decision, be honest with the person who asked for the loan. Tell them how it relates to your financial situation and how you had to take your own family into consideration. If the answer is no, and they truly don’t understand, you have, without question, made the right decision. Honesty and respect are essential if your relationships—and your checkbooks—are to remain balanced.
Stacey Tisdale is a veteran on-air financial journalist. She's the author of The True Cost of Happiness: The Real Story Behind Managing Your Money. She is also a board member of nonprofit financial literacy organization, Operation HOPE.