Plenty of people have budget shortfalls from time to time, especially right before, or during, the holidays. Figuring out how to handle it can be different, depending on each person’s situation.
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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Personal Capital lets you see all of your accounts in one convenient place. Sign up now for free.Have you ever been asked to loan money to a family member?
I agree! You work hard for your money. Don’t give it to someone who is unlikely to give it back.
It’s very difficult to deny close friends, roommates, and family who appear to be in need. At the same time, you also have to make sure you take care of yourself and your own family too. Thanks for your viewpoint.
Hello Jeanne,
I appreciate you for writing in detail the points you have mentioned in your post. I’m in a very similar point within my life. I also faced this type of the problem last month. I hope I can change something in my life.
I hope you can too. It’s not easy whether you are the one needing help from others (asking can be almost as hard as giving) or are the one who has been asked for money. Good luck and I hope you have a more positive future!
I am moving toward family, so this post is very helpful!!
Of course, I am not saying you should never help family. At the same time, you must use caution and not give more than you can afford to. I hope being near family is good for you and you all bless each other in many ways!
Hi,
I could not agree more! I loaned my sister roughly $1000 when she had big car troubles and had no way of paying for it – although she really needed a car.
This was over two years ago, and I can’t seem to get her to understand that I need that money back. Now she has a good(ish) job and a steady income. But she always has an excuse. It’s tiresome.
Thanks. =)
I’m sorry to hear that you got duped just as we did. Although my husband and I shelled out quite a bit more than you did, we are chalking it up to a very expensive lesson learned. I know we’ll never see that money again. I hope you are able to get yours back. 🙂
I’ve learned this the hard way, like many of you. I am at the point that when friends or family ask, I simply say it’s not worth losing our relationship.
That’s a good way to put it and very true. Things could go fine and everyone could hold up their end of the bargain, but they could also turn sour too. Then not only is there a money issue but family drama too. Thanks for your comments.
This article is so on point.
Thank you! I do believe in passing on what I’ve learned. If any of the hard stuff we go through helps one other person I feel like it’s worth it!
Yes, its true, and every thing you mentioned on the blog is practical in life also. Loans can definitely put you in debt…I agree with you.
Some of these points can be used in other areas of life – that’s a good point. You should never loan tools, treasured possessions, family heirlooms, or other expensive items to family or close friends. You could lose both the friend/family member and the item.
Wow, doesn’t this hit home. I’ve actually had some decent luck with family members, worse with my own friends. But at the end of the day, I think that depending on the dollar amount, you need to at least set up some sort of binding contract. I’ve had to do it before with family members and it’s no harm no foul.
I agree. If it’s just a few dollars, like under $50, perhaps a contract isn’t worth the effort. When it comes to thousands, however, a contract is a must if you want to ensure the protection of all parties. When you loaned to family members, did you go to a lawyer to draw up a contract, use the internet to find one as an example, or create your own?
Well written and I happen to agree fully! Loaning money to somebody we know like the relatives, friends, or whatever is possibly the easiest way to end the relationship.
Hi Jeanne,
I totally agree with you. But, it’s very difficult to deny family and close friends.
I understand. We didn’t deny family either, but in hind sight, wish we would have. We could have used those thousands for ourselves, and I don’t mean for a vacation. We’ve had some rough times of our own over the years and had to find our own way through it without help from anyone. Anyway, I’m not saying you should NEVER help family or close friends. Just make sure you go into it knowing that you may not ever see that money again. If you’re alright with that, then go for it. But if you expect it to be repaid, take precautionary measures to ensure that you do get the money back. Thanks for your comments!