Seven rules for lending money

There’s an old rule about lending money to a family member. And it goes kind of like, well, how do we put this gently? ‘Don’t do it’. Yes, that’s it.

Now, it’s a general rule. There are plenty of examples of happy families after one member has lent the other substantial amounts of money to help them with a major purchase or to get them out of a jam. It’s just that probably more often than not, lending money to friends or family can turn an otherwise amicable relationship into a complete and utter shambles. That’s the nice way of saying it.

Now, that’s not to say you should ever feel obliged to lend money to anyone. Obviously, you have the right to say no. And if you do say no, that decision should be respected, especially if you have a good reason or explain why you don’t want to or can’t lend money.

However, if you do find yourself in the position of either a) being able to lend a friend or family member some money or b) feeling as if you have no choice, as a decent and moral human being, to lend a loved one some money, then here are the seven rules of thumb to follow to help keep your relationship positive.

1. Don’t lend money you can’t afford to lose
It’s already a huge gamble lending loved ones money, made even bigger if you’re not prepared to lose that money. If you feel unsure or anxious about this situation, you’re better off backing out sooner than later. If you can afford to not be paid back, then you have less riding on it, and you may feel more at ease about potentially giving that money away.

2. Make sure it won’t put you out too much
If you have bills to pay, or lending money to someone else will put your own living situation in peril (like, say, you can’t make your mortgage repayments), then you best check your financial situation, including leaving a safety net for any emergencies, to make sure you can go without the money you’ll lend. Having to ask for money back before the recipient can pay it back is a sure path towards animosity.

3. Ask why they need the money
Okay, you can afford to lend some money. The next step is to make sure you’re not being used as a bank to fund bad habits or poor decisions. Your loan should be seen as an investment, so take on the position of an investor and make sure your money is in good hands. You have the right to know where your money is going and knowing such will hopefully improve your chances of seeing it returned.

4. Weigh up how it will affect your relationship
If you say yes, do you risk being asked again, and again? Or do you risk becoming to ‘go-to’ for any other family member needing a helping hand? Will lending the money diminish your respect for this person? If they couldn’t pay you back on time, or at all, would it ruin your relationship? These are questions you should answer before handing over any cash.

5. Get it in writing
If you say yes, then type up an email or letter and have the terms of the loan clearly defined, as well as any deadlines for repayments, how often and how it should be repaid and any interest (if any). The details in a verbal agreement can be quickly forgotten, whether accidentally or conveniently. Cover your bases by having it in writing.

6. Don’t backslide on your terms
If the recipient misses a repayment, make sure they pay you as soon as possible. Treat your money as a lender would treat a loan. If they can’t make a cash payment, take it out in other ways, such as labour or something they really don’t want to be doing or something they really don’t want to give up. It may make them think twice about missing another payment.

7. Is there another way?
Maybe lending them money isn’t the answer. Or maybe you just don’t have it to lend. In that case, is there another way you can help? Maybe babysitting your grandchildren instead of having them in childcare or day care. Or maybe having the kids over for a meal – or cooking meals for them – a couple of nights a week could help ease pressure on their purse strings. Maybe you know someone who could use a little help around their home and are prepared to pay for it. There are more ways to help someone out than with money, you may have to get creative in how you can help.

Have you ever lent a family member money? How did you ensure your relationship stayed amicable? Or did it turn sour? What tips can you give our members?

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Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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