Lending Money to Family

[Guest Post] To Lend or Not to Lend: How to Know When to Give Money, Lend It or Say No

Gen Y Finance Guy General Information 9 Comments

Someone you’re close to asks you for money.

Many of us have found ourselves at this crossroad at some point. These are typically trying times when you’re torn between extending financial help to a loved one or sticking to your guns to avoid an uneasy or strained relationship in the future.

They say that money and friendship rarely mix, and this becomes evident when a close friend or family member asks for a substantial sum of money. Knowing how and when to draw the line between financial responsibility and family expectations can save you a myriad of potential personal problems.

In fact, according to The Simple Dollar, the bitter truth is that regardless of the nature of the outcome or aftermath, things will never be the same again after handing a wad of cash to your closest cousin or elder brother.

At this juncture, you have three options at your disposal. Here is a quick primer to each of them.

Option 1: Cave to the Pressure and Give Them the Money

At times, a friend/family’s need for money might seem so urgent and vital that it is virtually impossible to say “No” right to their faces. It could be that they need to offset an emergency medical bill, for instance, or are confronted with legal issues.

Most of the time, however, your relative’s need for cash is not that pressing or urgent. People who need money ASAP tend to spend it frivolously.

If you are not entirely convinced that this person truly needs the money, try to intentionally stall. You might be surprised to learn that they don’t need that money as much as you thought.

Nonetheless, if you are going to offer someone a neat sum of money, you ought to make a few things clear to them. For starters, let them know that you don’t expect it back, and that you have willingly decided to let them have the money without attaching any emotions or expectations to it. This is a polite way of saying that you have no qualms about placing family or friendship before money.

If this person is a habitual borrower, it is imperative to let them know that you are not exactly thrilled with their habit. If it helps, let them understand that you are not comfortable with using money as a short-term fix for major underlying problems. In short, make it clear that this is a one-time gift and not a show of your unconditional generosity.

Option 2: Loan the Money

J.D. Roth from Get Rich Slowly writes at Time, that finding a way that doesn’t involve handing someone cash could be the most practical and constructive way of navigating such a dicey situation.

Sure, throwing money at a problem can keep a nagging friend or relative at bay. But it could also only be a temporary solution to a larger problem. So, instead of offering financial aid, make an effort to understand the would-be borrower’s problem first. This way, you can discuss and come up with better avenues for them to earn that cash without you having to hand it to them directly.

That help could take many shapes: Referring them to a job opportunity, making a helpful introduction, offering constructive advice on managing finances. In the process, one of two things could happen: They might realize they don’t need the money enough to make the effort; or they could end up not just with the money but the skills to make it and keep it. Either way, this could create a win-win situation.

In the event that you decide to loan them the cash, take some measures to cushion yourself against future agony:

  1. Make sure you are only lending them money that you can afford to lose. In other words, don’t jeopardize your cash flow or your investments to help someone out, as you are not guaranteed to get that money back.
  2. Avoid handing out money without some sort of agreement, in writing, as to the terms of repayment. This way, they are contractually bound to pay you back, kith or kinship notwithstanding.
  3. Draw up a repayment schedule. Discuss any issues that might crop up in future, but remain firm about seeing the repayment schedule through to completion. Also, look into legal remedies to protect your loan.

Option 3: Decline

Saying “no” to a friend or family member is not easy. But at times it might be the best option, particularly when dealing with a perennial borrower who has a history of poor financial management. If anything, Moneyning advises that denying such a person direct cash aid is the first step in helping them come to terms with the harsh reality of a world where money is either earned or invested.

Of course, it’s hard not to let emotions or personal feelings cloud your decision. But as much as you are expected to help out your family or friend whenever they are in real need, remember that you are not obligated to accommodate every monetary request they make.



Casey Meehan is a writer at Stock Hax, a blog about personal finance and investment strategies. He is also the founder of Epic Presence, a digital marketing agency in Chicago.

Gen Y Finance Guy

Hey, I’m Dom - the man behind the cartoon. You’ll notice that I sign off as "Gen Y Finance Guy" on all my posts, due to the fact that I write this blog anonymously (at least for now). I like to think of myself as the Chief Freedom Officer here of my little corner of the internet. In the real world, I’m a 30-something C-Suite executive. I am trying to humanize finance by sharing my own journey to Financial Freedom. I believe in total honesty and transparency. That is why before I ever started blogging, I decided that I would share all of my own financial stats. I do this not to brag, but instead to inspire motivate, and also to hold myself accountable. My goal is to be a beacon of hope, motivation, and inspiration, for you, the reader, by living life by example and sharing it all here on the blog. My sincere hope is that you will be able to learn from me - both from my successes and my failures! Read More

Comments 9

  1. #2 is the way to go for sure. “Teach someone to fish…” 😉

    That said, I’ll sometimes still lend some money. Never because I “cave” though – just because I’m feeling led to do it and it won’t impact me if I never get the money back for some reason.

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  2. Great post, great subject! As someone who has ‘lent, and lost’, two thoughts may be of interest…

    1) Ask yourself, ‘why are they asking me?’ Have you bragged about how much a vacation, car, home, meal, clothes, watch, concert, cost? Does this person know how much money you earn? How big your last raise was? Your new promotion title? Drop a ‘conversational breadcrumb’ about how you are about to buy a new rental property, or make an investment, looking at a new car? How much you ‘saved’ on your remodel, new set of furniture, blah, blah, blah?

    IRL, talking about these things is a passive-aggressive form of a ‘big d*ck contest’ and wanting to compare (and win!) yourself to others. It is transparent and obnoxious, even if they play along or do it, too.

    2) Ask these questions and demand solid answers: What do you need it for? Why are you asking me (and not your parents or others)? How will you pay it back? When will you pay it back? I have found that asking these questions will make the person think twice about you, as a source of funds, and delay the answers or request. If they push on, ask them to write it up with that information, with two copies for you both to sign. I have found just making that small request for them to do the work of writing a short agreement and signing it is enough to discourage further discussion. And it is hard to do, but permissible, to say “that’s not a good reason.”

    Lastly, no matter your response, don’t be surprised when (not if) the relationship cools. The person who made the ‘ask’ has decided that the relationship is expendable, already.

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  3. Ayuuuup. I remember the first time I lent someone money, and after that point I decided to never lend money again. Fortunately it was only $20 to a friend in high school, but she never did return that money. The only scenario where I would lend money now is if my dad or sister were in a tight spot. Even then, it would require drawing up some serious paperwork.

  4. For me the amount of money is a factor. Under $50? That’s restaurant money for me, or when I might treat a friend to dinner. I can cook at home more if that’s really what the person needs.
    I was in a long term relationship and loaned him money. Each time I said ‘this is a loan, you will pay me back’ &he agreed. He was shocked when I handed him a ‘bill’ from excel. I was surprised at the total and have been mindful of this ever since.

  5. I don’t lend money to friends. If a friend asks me for money, either I give it to him as a gift, or I just say no. A good friend will always repay a gift without you even asking. It’s just too akward to ask a friend to get your money back (in the case of a loan).

  6. Sometimes bad things happen to good people. It is not always a situation of that person is bad at handling money. What they do to rectify the situation, like getting another job but the financial issues cannot wait until the first paycheck.

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