Hidden Cost of Lending Money to Friends and Family
How to help — without hurting your finances, and the relationship.
The desire to help loved ones is propelled by the deepest and strongest of bonds. And right now, given the high unemployment let loose by the coronavirus crisis, you may find yourself wanting to help, or being outright asked to help.
The decision is, of course, highly personal. But to avoid creating financial hardship for you (loans not repaid) and preserve the relationship, you may want to avoid being led solely by your heart, and layer in some smart steps to avoid problems down the line.
Don’t assume it will all just work out. A recent survey from Bankrate.com found nearly four in 10 lenders to family and friends say they lost money. Perhaps most damaging, one in five say the relationship suffered.
Before you lend, here’s a checklist.
Will the money come from excess savings? Using your emergency fund to help someone else makes little sense, if it depletes your savings to the point that you are at risk if your financial life encounters trouble.
Can you afford to never be repaid a penny — financially and emotionally? Both costs need to be carefully considered. Sure, you expect to be repaid, but smart risk management involves challenging yourself to consider the consequence of what happens if your assumption is wrong. Can you afford the consequence of not being repaid?
Are you sure you’re really helping? Lending money so someone can make the rent payment, or cover other essential expenses is the very definition of helping someone in need. But lending someone money to buy a nice new car? Or buy a bigger house than they could afford on their own? That seems to cross the line into lending money to help with a want, not a need.
Got a friend or relative who repeatedly has come to you for help? That might be a sign of someone who needs an intervention to take control of overspending, or too heavy a debt load. The National Foundation for Credit Counseling is a nonprofit organization that can connect you with local (and legit!) debt counseling organizations.
Are they willing to make this a formal agreement? Yes, you love each other. Yes, there’s nothing you wouldn’t do for each other. That’s not the point.