Lending money to a family member in financial need can have implications for your finances—and your relationships. Before you agree to help out, there are several factors you should consider.
Understand the reality of loaning someone money with the help of a QAFP® professional or CFP® professional.
Lending a helping hand and a few dollars to a family member going through challenging times is a very common experience. It can have a tremendously positive impact on the life of a loved one. However, you should be prepared for the emotional and financial issues that may arise.
“Loaning money to a family member is complicated, with many feeling obliged to lend money they really can’t afford,” says Robyn Thompson, a CFP professional and president of Castlemark Wealth Management in Toronto, Ontario. “When borrowers default on the loan, the situation becomes uncomfortable and emotionally driven from both sides.”
Before lending the cash, Thompson says it’s important to properly evaluate the situation and your own financial well-being. This will help ensure you aren’t left in a challenging financial situation—or with feelings of resentment. It can be difficult to do, especially considering the emotions involved when you’re dealing with loved ones. Fortunately, the right CFP professional or QAFP professional can help you navigate the situation, factoring in your feelings while providing realistic financial advice.
“It’s hard to say no to family, but if you have to turn them down, tell them why.” – Robyn Thompson
Below are Thompson’s top tips on what to consider before loaning money to a family member:
The biggest mistake is to say “yes” before thinking it through. Carefully consider lending money that has been set aside for retirement savings, a mortgage payment, or everyday living expenses. Be sure to assess your own needs so your financial security is not weakened.
The truth is, unless you have a formal agreement related to a business, it’s unlikely you’ll see your cash again. For this reason, you should only loan money if you’re sure you can live without it. If you find yourself in this situation, you may want to focus on the satisfaction you feel in knowing your loan has been put to good use.
If you have a life partner, be sure to discuss any loan requests with them— especially if the money is coming from the family pot. You must both agree to the terms. That way, if the loan never gets paid back, any strain on your relationship will likely be minimal.
If you’re in a situation where the loan must be paid back financially, put the terms in writing so there’s no confusion. Both parties must treat it like a business transaction.
Before lending money, know that it could potentially change, or even end, a relationship— with your sibling, the borrower, your partner, etc. Ask yourself if the potential loss of a relationship is worth it.
A CFP professional or QAFP professional can help you identify the long-term implications that loaning money will have on your overall financial plan.
“It’s hard to say no to family, but if you have to turn them down, tell them why,” says Thompson.
She noted that if you’ve already loaned money that you’re having trouble recouping, you should have an honest discussion. “It may be a temporary setback that can be remedied. Not talking about the elephant in the room will only make that elephant bigger.”
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