The Pitfalls of Lending Money to Family

With insolvency proceedings rapidly rising across the country and thousands of Canadians still out of work, we are facing challenging economic times. During times like these many individuals begin to look at those closest to them for financial assistance. Often friends and family are approached for loans to help, however, family lending can be fraught with challenges and pitfalls. Therefore, caution is advised.

The Most Common Pitfalls of Lending Money to Family

At one point or another, we all have, myself included, lent money to family and perhaps even borrowed money from them. In either situation, the outcome is not always ideal. I personally have learned a lot from my experiences and have outlined some of the issues you might face should you decide to lend money to family in the future.

1. There are no terms to the loans: Often loans to family are open-ended which means that there isn’t an agreed-upon timeline for repayment, and often they don’t include any interest on the loans. This will leave the lender (you) in limbo. Not knowing when you will be repaid can often lead to personal stress as you might’ve been expecting a repayment so that you can meet your own bill payments.

Protip: If you do decide to lend money to family or anyone, always agree to a repayment schedule so that you are not left wondering when or if you will receive your money.

2. It’s often difficult to ask for the money back: It is difficult to ask someone you care about for the money you lent them, as often such a conversation makes one feel very awkward. If both parties attempt to ignore the situation and not talk about it, it can often lead to a sense of confusion and hurt feelings between those we are closest with.

Protip: If you do decide to lend money to family or anyone, always ensure that you would be comfortable with having this conversation with them before advancing them any money.

3. Family loans are not a priority: Often loans from family are the last to be repaid as they are often interest-free and they do not affect the credit score of the borrower. This leaves the borrower with little incentive to return the funds in a timely manner and can often leave the lender wondering when they will be repaid.

Protip: If you do decide to lend money to family or anyone, always ensure that if the funds are not paid to you in a timely manner that it will not cause you to be late on your own bill payments.

4. A vicious cycle: The person borrowing the money may become dependent on the lender and can return more frequently to borrow more money. If you are a person that has difficulty saying “No” this will often lead you to a point when you are unable to meet your own debt obligations. Avoid becoming the family ATM.

5. Losing money and a relationship: If you lend money to family, always be aware that there is a possibility that you will not get your money back. This may damage your relationship with them and result in ongoing tension.

Protip: If you are worried about damaging your relationship with them it’s always best to not lend any money. This is the best way to avoid any future tension or arguments.

Co-signing Debt – More Pitfalls

Co-signing a loan can also cause personal and financial problems. You might think that co-signing for something like a car loan or a rental agreement will not have the same direct impact on you as lending them money; however, it can and often still does, negatively affect your finances when things go awry.

In the event of missed payments, as a co-signer, you are agreeing to make up for any payments that may be missed, and the lender may come after you for these payments. These payments may eventually begin to affect your own personal credit score so it’s always best to ensure that you are in a secure financial position prior to co-signing any debt for family.

Other Options

I know from personal experience that it’s difficult to refuse to lend money or co-sign a lease for a family. Lending money often has a way of coming between you and those you love even though you were only trying to help. If helping family is going to put a strain on your own finances its best to try to find other ways you can help such as:

• Talk to them about their finances. Ask them to work out a budget with you and see if you can help them find areas in the budget that can be improved.
• Talk to them about other loan options, such as obtaining a line of credit. Ensure they understand the risks of high-interest loans such as “payday loans” and “cash advances”.
• Discuss ways they can improve their own credit scores.

In the end, if you do decide to help your family and lend them money, remember to only lend as much as you can afford to lose. If you think of the amount as a gift rather than a loan, and that there is a high chance you will never see the money again, it will likely help to ease any negative experiences you might have. Letting this concept sink in will help you avoid damaging your relationship with your family in the event they do not pay you back.