Deciding whether to loan money to family is an increasingly common predicament. It may be a more regular occurrence for parents as more millennials move back home. However, this can also happen with parents or siblings. What should you do? As with most situations involving your hard-earned money, the answer isn’t a simple yes or no.
Before You Loan Money
Here are some questions to ask:
- What are the risks?
- Why is it needed?
- When is it needed?
- Were other options considered or exhausted first?
The answers to the questions above can usually determine if the request has merit. If you are still mulling it over, there is a more in-depth analysis required. First, you have to determine if the person is responsible and trustworthy. Asking for a loan is not inherently irresponsible, but it should factor into your decision.
As an example, let’s say you’re an angel investor that likes to help build small businesses. If your niece needs additional funding for a promising startup, then it would make sense for her to ask you. You can see that she is fundraising and you’re not the sole source of capital. You are aware of the risks, but the reward might be worth it for you. Also, you would know to do your research and review all of the details before entering an agreement.
If she is notorious for get-rich-quick schemes, then you should probably say no.
Here is an example of an irresponsible request. Let’s say your adult son asks for cash to pay his rent that is due tomorrow. This situation is generally not an emergency. His rent payment is not a surprise as it is a recurring expense, and he waited until the last minute to ask. As your child, he may use parental guilt to manipulate you to help. If he can’t afford his apartment, then it may be time to discuss ways to increase his income or change his living situation.
However, if you find out he’s a victim of identity theft, and his account is frozen, then you can move on to the subsequent phase of the analysis.
Can you afford it?
Next, you have to consider whether you can afford it. Having the money and being able to provide it are two different things. Review your accounts to determine if it would be okay if you never see the money again. It is a strong possibility that a family member will use your relationship as a reason not to pay you back. If you have that money earmarked for a priority, you should err on the side of caution and say no. Alternatively, you can offer a lower amount. If your cousin asks to borrow $200, offer to contribute $50 or less. Only provide what you are comfortable giving.
Additionally, you should avoid co-signing any loans or leases for family members. It may be hard to avoid with graduates carrying high student loan balances. High expenses and low credit scores make affordable housing hard to come by. However, your relative should consider all of the options within their budget before asking for financial assistance. If your child moves back home, you can charge a small fee for rent, food, and utilities. Your child is saving money, and you aren’t stretching yourself to cover the additional expenses.
Loaning money is a hard decision. You have to do what’s best for you, your family, and your finances.