Lending Money to Family Is Complicated. Here’s How to Do it Right.

Remember: Any discussion about money is about more than money.

When a family member falls on hard times and needs a hand, stepping up is the sensible thing to do. The immediate reaction should be: What do you need and how can I help? But when the ensuing request is for financial help, the decision becomes a bit more difficult. Dealing with family is rarely drama-free. But lending money to family is riddled with conflict. It immediately creates a situation that dredges up resentment, anger, and worry. How, then, do you go through with a family loan without it being such a nightmare?

Even in the most straightforward agreement, money creates an imbalance. It involves power and control. You have it. They don’t, and, if the deal goes bad, the nature of your relationship, and the family dynamic, can be changed for good. It can be, in a word, “messy”, says Jennifer Calder, financial therapist in Montpelier, Vermont.

Still, you’re not turning away from a relative, and a family loan does not automatically mean disaster. But, to make lending money work, you need to balance your head and heart. It takes self-examination about what you’re getting into and it involves having open conversations. This isn’t a fun exercise. But the process can head off the anxiety, reduce surprises, and end up making a deal that works for both sides.

Responding to a Family Loan Request: What to Think About

Your brother asks you for money. You want to respond, “Of course,” but the answer can’t be impulsive. You need time. There are complications, both obvious and unforeseen, to explore. So how do you begin?

Calder says to start with two essential, fair questions: “How much?” and “What’s it for?” Once you have the basics, it’s perfectly reasonable to then say, “Let me think about this for a couple of says,” because there is even more to take into account.

On the practical level, the main concern is Can I afford to give him this money? Over-extending yourself merely causes stress that can bubble up into resentment. If the amount of money he’s requesting is doable, then you have to talk it over with your spouse, particularly if its a joint account. Not mentioning it, Calder notes, is breeding ground for financial infidelity. Lying to your spouse about money is never a good move.

But the considerations you need to make before lending money to family are not all practical. The most essential is a basic rule of lending: You may never see the money again. But you will see this person again. You have to ask yourself: How will I feel if it’s not repaid?, notes Alex Melkumian, financial therapist and founder of Financial Psychology Center in Los Angeles.

This is an important question. And if you’re comfortable with the prospect, it becomes a smoother process. Calder and Melkumian both say that making it a gift — tax implications, aside – makes it even smoother. (More on that in a bit.) But before you go ahead, it’s necessary to think: Is this request part of a troubling pattern or a sign of atypical hard times?

With all these considerations laid out, you come to three options:

  1. Yes.
  2. No, I can’t.
  3. No, I don’t want to.

Regardless of your answer, the conversation continues, and ways to help are still possible.

Lending Money to Family: If Your Answer Is No.

If a family member asks you to lend them money and your answer is “No,” the way in which you deliver your answer is crucial. Is the reason because of your financial situation? Say “I love you, but I can’t afford it right now.” Is the reason because you don’t feel comfortable giving the money, say something like, “I love you too much and I’m worried that this will damage our relationship.” It’s not a desired answer, obviously. But you can follow either with, “I still want to help,” and then you two can brainstorm.

Depending on the underlying issue – bad job, outdated skills, poor money management – you could offer to pay for a counselor or adviser. You could look for ways to free up your brother’s time in order to job hunt or take a class. The point is, as Melkumian notes, “money is not the only resource.”

Lending Money to Family: If Your Answer Is Yes

If your answer is yes, then you need to talk with the requestor frankly. Again, it’s simpler to gift it, and you can put it on yourself with, “Do this for me. I don’t want to jeopardize us. Pay me back if you can, but you don’t have to.” It doesn’t take away all the guilt, but some weight is lifted, notes Melkumian. Plus, the option still exists to repay, which doesn’t conflict with the asker’s pride.

But if you are going to make it a family loan, you have to figure out the details of interest and repayment, and go through as many scenarios as possible. Calder calls these the “What-ifs?”, the most important being if repayment can’t happen.

One thing that helps is to set a re-payment schedule that includes regular check-ins where you talk about the practical as well as the emotional issues. It could be asking along the way, “How are you doing?” Remember, it’s family, and, “Family relationships are more important than money,” Melkumian says.

With the schedule, you’ve built in a release valve. You, as the lender, don’t have to stew or wonder about what’s happening, because you know you two will be talking. “The more we leave to the imagination, the more opportunity there is for stress, anxiety and resentment,” he says.

And talking serves two more purposes. It’s a barometer, for one. If your relative isn’t willing to engage, it’s a strong sign that lending isn’t wise. But by getting everything out, fewer things will come as a shock. “The more you talk about the transaction, it will become easier to talk about it,” Calder says.

Gaining a Release

Here’s one more thing to accept: Once you give the money, it’s gone, and you need to let it go, Calder says. You can’t constantly check up on or micro-manage the person. At family gatherings or even on text threads, no one wants to feel judged or that every comment is interpreted through the outstanding loan.

Here’s a way to reframe perspective. Instead of focusing on the money, Melkumian says, think of this: Your brother or sister is struggling. You want to see him or her rebound and you want your relationship to remain strong. Act like you would with watching your stocks or even your hair grow. Progress isn’t seen by the hour, day, or week. You’re making an investment into someone you care about. That takes time. “Trust the process,” he says.