Assisting a family member financially can definitely put a strain on your budget. It's important to set clear boundaries on the support you're able to offer to prevent becoming their personal ATM during tough times. By sticking to these guidelines, you can support your family without feeling overwhelmed by guilt.
Five things to consider before lending money to a family member:
1. Decide how much you can afford to lend.
When a family member asks for money, determine how much you can afford to lend that family member. Look at your budget and consider your future goals before agreeing to loan your family money. If loaning your family member money will cause you financial strain, you should consider declining their request for financial assistance. If you have room in your budget to afford your monthly and future expenses, then you may have some room to provide them with a temporary loan that doesn't affect your financial future negatively.
2. Come to an agreement on the terms of the loan.
You will want to make rules around the repayment terms of the loan. Consider the following questions:
How much will they be required to repay you monthly?
How much interest will you charge them, if any?
How long will they have to pay you back?
Will you allow them to pay you back early?
What are the consequences of paying you late?
Will you require them to sign a loan agreement, or will the agreement be a verbal understanding?
Consider that a written agreement is important to protect everyone involved, especially for substantial loan amounts.
3. Make sure the loan doesn't put a strain on your relationship.
Lending money within a family can strain relationships, especially if it starts affecting household finances. It's crucial to align with your partner on financial matters and ensure that any loans to family members do not hinder your shared goals. I've observed instances where lending money to family members has caused conflict and financial strain in relationships, leading to disagreements or even separate finances due to the impact on bill payments and joint goals.
See my feature in Erika.com How Should Married Couples Split Finances?
4. Prepare for the loan to not be repaid. Be prepared to lose both the money and the relationship.
Although the loan you gave to your family member may have been with good intentions and the hope of being repaid, there is still a possibility that you may not receive the money back. In such a situation, there are two potential outcomes. The first option is to forgive the loan and decide not to lend money to that family member in the future. It's all part of the learning process, isn't it? The second scenario is to pursue legal action by enforcing the loan agreement and suing the family member for the unpaid amount along with legal expenses. It is crucial to remember that this course of action could damage your relationship with the family member being sued and possibly affect your rapport with other family members who may believe that forgiving the loan would be the better approach.
Ultimately, if you are hesitant about lending money to a family member, you are entitled to decline. It is important to assess the character of your family member and their capacity to generate the necessary funds independently. If you have any doubts about their repayment ability, trust your intuition. Moreover, if the family member can earn the money themselves, you can help them explore ways to manage their finances better and potentially reduce their reliance on borrowing money from you.
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