Some people just take a little money from their emergency fund and then replace it later. Others make arrangements with their creditors to make payments. Still others may ask family members for a loan.
That’s what happened in my family a few years ago. Unfortunately, it left several family members with a bad taste in their mouths. That’s when my husband and I decided there were too many reasons not to loan money to family members.
1. You Will Never See it Again
If you’ve been approached by a family member for money I would advise you to think it over carefully. Undoubtedly you feel badly for them and don’t want to see them in such a bad financial position.
Still, there’s a real possibility you’ll never see your money again. Believe me, I know that from experience.
The better option is to draw up a contract for both your protection and theirs. It should specify the details of repayment along with when the money is expected to be paid in full.
There should be penalties applied for late payments, such as interest. Otherwise your relative has little to encourage them to pay the money back timely.
You can go to sites such as Legalzoom to get a sample promissory note. Or, if warranted, contact a lawyer to create a contract for you.
2. It Strains the Relationship
Obviously if you loan money to family members it could cause relationships to be strained or even broken.
Relatives who owe money might be resentful of paying interest or signing contracts. At the same time, you could feel angry about any extra little thing your family member buys. After all, they could have put that money toward the loan you granted them.
It’s even worse if the family member defaults on the loan. In that type of situation, relationships could be damaged beyond repair.
3. Emergencies Might Crop Up
If you’re like me, or anyone else, I suspect, you’ve had your own money emergencies once in a while. If you haven’t, you probably will at some point in time. Not everything in life can be predicted.
That being the case, when you loan money to family members it could leave you in a jam. Sure, you may have had the money at the time. However, you could end up needing it yourself down the road.
4. The Loan Could Put You in Debt
Serious debt is among all of the other reasons not to loan money to relatives. This is a real concern if your own budget is already strained.
The last thing you want to do is end up in debt or with damaged credit because you let a family member borrow money from you. Although it isn’t easy, simply saying “no” might save you money and be better for everyone involved.
5. They Could Repeat the Request
Turning down family members who ask for a loan isn’t easy. Yet, you should keep in mind that they could repeat the request in the future once you agree.
In fact, you’re probably enabling them to repeat bad financial decisions that got them into trouble to begin with. Forking over money for their bills might temporarily ease their strain, but it’s only a band aid.
6. Future Goals May Be at Stake
Do you have goals or dreams of retiring in the future or traveling? When you loan money to family members that never pay it back you might put them as stake.
Your retirement accounts could end up smaller forcing you to stay in the work force longer than you planned. Additionally, travel may not be possible if you don’t have the money for it.
When family members approach you for money it’s not easy to know how to answer. My personal experience demonstrates why it’s a bad idea to loan money to family members. But everyone’s situation and opinions are different. Therefore, you’ll have to carefully consider all of the facts before deciding for yourself.
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Have you ever been asked to loan money to a family member?