While some people will tell you to “just say no,†when friends or family members ask you for a loan, the truth is, once they’ve made the ask, there is going to be tension–be it with the ‘would be’ borrower, other family members, or internally.
[Related: Feature: Intrafamily Mortgages — Paying Your Family Instead of a Bank]
“You don’t want to be the reason that a family member suffers
hardship, but you also don’t want a family member to be the reason that you experience hardships whether that be financially or emotionally as a result of the arrangement,†says money coach Tonya Rapley.That’s why Rapley and others in the behavioral finance space say it’s important to think about how you would really feel after you’ve made your decision.
â€We’re chemically wired to be drawn to situations where we can rescue someone,†says psychologist, Jeanette Raymond, Ph.D.
Other things to consider:
Don’t be an enabler:Â If you’re relative is unwilling to talk about living beyond their means and does not seem genuinely interested in creating a spending plan, you are enabling them. They will end up in more trouble down the road.
Look at your financial situation:Â If you’re struggling to make ends meet and don’t have enough money in an emergency fund to cover six months of living expenses, you can’t afford to lend. You should also never tap into money earmarked for retirement and education savings. If your relative does not understand this, you should probably be having a different conversation.
Who else would be affected by the loan? Make sure you discuss this decision with your family and other dependents before you make the loan, so that you can make the choice together. It’s not just your financial well-being that’s at stake.
Also, get real about the fact that if you give a relative, or anyone else for that matter, money, 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. If you can’t afford the gift, you can’t afford the loan.