Lending a Hand: How to Help Family financially but not get taken advantage of
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It is the nature of family to love and protect each other – but how does that transfer to the financial realm? Is your family obligated to help you with your financial debts? Are you obligated to help a family member who is overwhelmed with mortgage payments or saddled with massive credit card debt? Though the answer to both of these questions is probably no, it is a much more complicated than a simple yes or no answer. You and your family are not obligated to help each other with financial problems, but most people would like to help their loved ones with a crisis if it is within their means to do so.
When you face financial problems, it is probably tempting to turn to family first, rather than face the impersonality of a bank or other lending institution. But do family and finances really mix? Financial debts to family members can complicate even the best relationships and in extreme situations it can result in nasty arguments and the severing of familial bonds. Some of the most common arguments families have are over money. On the other hand, borrowing money from family and having that security can ease the stress of any financial crisis. If family members have the money you need in their savings account and are willing to lend it to you, then why not pay the interest to them instead of the bank?
Right from the start, you need to be realistic about your financial situation. As the person looking to borrow money, you should ensure that you have cut back on non-essential expenses and have exhausted all the possibilities before approaching family members for money. As the lender, you must also take a close look at your financial situation and make sure you have the money to offer to your family member. If it is not within your means to help them, then you must say so. There is no point both of you going into debt just because you have the desire rather than the means to honor the request for money. It is hard to say no to family, but sometimes it is necessary.
Where most families go wrong with lending to one another is a failure to establish firm guidelines and rules. You need to be very clear from the start whether this is a gift or a loan. If you give money without specifying which it is (a gift or a loan), then the other person may just assume it is a gift. If you need the money back down the road, he or she may not have the means to repay it, because there was no understanding at the start that the money would have to be repaid at some point. Even though you are dealing with your mother or father or your daughter or your son, you still need to treat the arrangement as you bank or lending agency would. You need to write down the amount being lent and the agreement you have made concerning the amount to be paid back and the amount of time that repayment will take. Writing it down will solidify the arrangement and ensure that no one is taken advantage of.
You and your family should agree on a reasonable interest rate and you should also consider arranging monthly payments (as you would with the bank or other lending institution). It is better to pay the money back gradually over time rather than try to gather one lump sum.
If you are the one borrowing money, you need to make sure that they money is used only for the thing it was lent to you for. If you have borrowed money for the down payment of your house, then all of that money needs to be put into the home, not a new pair of shoes or vacation to the Bahamas. Problems arise when family members think that they money they have lent is being misspent or mismanaged.
As you can see, family and finances can mix if you take a few precautions and clearly outline the expectations on both sides. It is worth putting in the extra effort to prevent uncomfortable holiday dinner scenes.
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