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Before You Break the Piggy Bank! 5 Things To Remember Before Lending Money to Family
Times are tough, and money can be scarce. If you are ever in a bind, you may consider asking your family for money. But of course, sometimes the table turns. If a family member asked you for money, you could feel obliged because they are family, but when a nephew or cousin comes asking to borrow some cash, it can be hard to refuse this request. What are the things you need to remember when it comes to lending money to family members?
Take Your Emotions Out of the Equation
It’s so easy to think that we are lending money to family because we care about them and we want them to get out of trouble, but we’ve got to remove our emotions from the deal. In fact, it’s best to treat it like a business deal. When we start to give money to people, it can slowly turn into something where they may unwittingly take advantage of us. You may find yourself struggling to lend money because of limited resources. But there are things that you can do, for example turning your IRA into a lender, which is a great way to make it more official. You can learn more about turning your IRA into a lender at this link, but if you are looking at lending a significant sum of money, it’s got to be without emotion.
Expect Slow Repayment
The problem with lending money to family members is that it’s not the same type of dynamic as you would a bank. A bank is a big scary organization that is very likely to turn around and say “no.” Part of the reason they have asked you for money is because you are more likely to cough up. You may very well say to them that they don’t have to rush to pay things back, but you will have to expect that they will be slow in repaying. When people borrow from family or friends, they don’t consider these loans as seriously as they would the banks, which means they are more casual in returning the money. You cannot demand anything like interest payments or collateral because you may want to focus on having a relationship with the person rather than the finances.
Go in With Your Eyes Open
If a young nephew was asking you for money, they will have no credit history or they have gone overboard with their spending, so they’ve had to look for financial alternatives. And if someone is asking you for money, you’ve got to think about their past behavior, what they are using the funds for, if they’ve actually asked you for money in the past, and if there is a likelihood of you being paid back. You may want to ask them how they plan on paying this back because this puts them in a position where they feel obliged that they have to pay it back. You could make this official, and set up a contract. You may think this is overkill, but it’s a way to make sure that everybody is accountable, and will reduce many of the problems linked with family loans.
Do Not Forget the Rules for Gifting Money
If you are loaning the money, and you are giving up on the idea of never getting it back, you may think about turning it into a gift, which could be beneficial for your relationship. But you have to remember there are rules established by the IRS. The IRS has a $15,000 gift tax rule, and it is always worth having this at the back of your mind, especially if you don’t think they will repay you anytime soon.
Make Sure the Relevant Family Members Are on Board
If you are in a relationship and you are sharing your bank account with someone else, you’ve got to make sure that they are in agreement with your decision to lend money to someone else. Money is one of those things that causes a lot of strain between families, and of course, a lot of divorces arise from arguments about money. So if you are trying to save money, are you going to be able to loan money and guarantee you’ll get it back? It’s far better to have no secrets and make sure that your loved ones are involved right away.
There are no guarantees that a family loan is going to cause conflict, but if you ever agree to lend money to someone, you’ve got to make sure there is a plan in place.
