Having a fair amount of savings is a blessing people bestow upon themselves through diligent budgeting, hard work, and living below one’s means. One of the great things about keeping the money one makes is that it can be used to help worthy causes and loved ones.
When it comes to helping loved ones through a family loan there are some inherent risks. The challenges that come with loaning money to family members begins with a clear understanding between both parties.
The Lending Terms of a Family Loan
When loaning money to a family member it is imperative that the transaction is treated as though business is being conducted. This is for the good of both parties.
The terms should specify what amount is being lent, how long it will be paid back in, the payments to necessitate this period, the interest rate (if any), and the results of non-payment.
Should you Lend Money to Family?
If this process of creating a contract with an impartial witness, such as a notary public, seems uncomfortable, it will be even more uncomfortable if no contract is made and the family member who received the loan pretends nothing of the sort had ever happened.
Some family members are great candidates for receiving a loan, and others should seek the assistance of a bank, leading the answer to the above question, ‘should you lend money to family?’ to be, it depends on the family.
If the lender is going to feel a right to tell his family member’s personal business now that he or she is his banker, then this is a person who should not loan money to family. If the borrower is going to feel entitled to the money if paying it back is less comfortable than taking a vacation and buying a new car, then this is a person who shouldn’t be lent to.
Pros and Cons of Loaning Money to Family
There are several reasons not to lend money to family, but on the side of where it is good includes:
- Helping a loved one
- Keeping money in the family
- Gaining experience in business
Cons of giving a family loan are often discussed by radio show host Dave Ramsey who says on The Dave Ramsey Show that ‘Thanksgiving dinner tastes different when it’s with your banker.’
In addition to this, the lender must not loan more than he has the capacity to forgive both emotionally and financially. If this amount is $0, then the con here is that the lender realizes he needs to either change his financial habits, or his ranking of importance of money.
When giving a family loan it is important to understand that the loan may end up becoming a gift. If this transition cannot occur, then the relationship can end up in ruin, and that isn’t worth any amount of money.