Is Lending Money to Family Members a Good Idea?

Suzanna De Baca -- Expert Business Source, 7/2/2008 7:49:00 AM

Dear Suzanna:

I am a successful business owner with a substantial income.  Life is great, except that my siblings (all adults) are terrible with money and constantly ask me to help them out.  I don’t mind helping, but they don’t seem to even try to develop good habits and just keep borrowing money that they never repay.  What can I do?

From “Feeling Used”

Dear Used:

While it can be a great feeling to share your success, it’s one thing to lend a helping hand when your family is in need and another thing entirely to be taken advantage of. You sign your letter “Feeling Used,” so it’s clear that this behavior is already damaging your relationships. Changing other people never seems to work very well, so the solution to your problem will depend on you changing your own responses to your siblings’ requests.

If you’ve been playing banker but haven’t been collecting, it’s easy to see why they keep coming back for more.  They’ve learned you’re a softie and that there are no consequences to their irresponsible behavior.   It will be up to you to set some boundaries regarding your financial assistance in order to preserve good family relations.

Here are a few ideas to consider when dealing with family members who want to borrow money:

1. Be clear.  It’s okay to change the rules but you have to be clear – you can tell your siblings that you feel they are taking advantage of your generosity by making no attempt to either repay your loans or change their habits. Let them know that you’ll make loans, but that you expect repayment on a schedule, clear communications, some sort of effort, or this will be the last time.  Be firm and stick to your terms.

2. Formalize the loan. Consider formalizing the loan by using written documents with clear parameters or turning to an outside intermediary.  Peer to peer lending sites facilitate loans between friends and family and the documentation and oversight seems to help increase accountability on the part of the borrower.

3. Make it a gift. If you want to help but doubt they’ll repay, make the payment a gift, not a loan.  You can tell them that you’ve been feeling used and you’d rather not have expectations that go unmet.  Or, you can more gently say that you’ll make this gift, but that in the future they’ll be responsible for their finances.

4. Talk about it. If an individual has a particularly bad track record, discuss this with them.  You wouldn’t do business with a person who did not respect your terms or appreciate your generosity, so ask yourself why you’re continuing to do it with a family member.  While it may be uncomfortable to get tough with family, you are already frustrated, so at the very least you can express your feelings about the way they’re treating you.

5. Say no. Last but not least, you can always just say no.  This is as much about your feelings and how your family treats you as it is about the money.  You can tell them that it isn’t your job to continue to bail them out if they make no efforts to pay you back or change their ways.

Loaning money to family or friends can be tricky.  But discussing the situation, setting some boundaries, and sticking to your terms can help. 

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.