|By Kari Johnson on May 5, 2011
When someone you care about is in financial trouble, it is only natural to want to help. When a family member asks you to give them a loan, it is hard to tell them no. However, there are some concerns that should caution you against lending money to family members.
Having a financial disagreement is one of the biggest problems families can face when it comes to interpersonal relationships. Lending money to family is especially hard. A loan is essentially a business transaction, and it is hard to mix business with personal relationships.
That being said, if you really want to help a family member having financial difficulties and you can afford it, it is preferable that you go with a gift rather than a loan.
Loans can cause interpersonal strife and tension. While you are waiting for them to pay you back, you may get impatient or frustrated, especially if you see them paying for other luxuries instead of paying you back. Asking for the money outright can be awkward and result in fighting. And if they do not pay the money back, the entire relationship could be ruined.
There are also some legal parameters you should keep in mind. Depending on how much you lend, the IRS may require you to charge them interest, or tax them for what you have lent them.
If you do end up lending money to family, it is best if you treat it as an average business transaction and get the terms in writing. Getting this done can protect your finances, but not necessarily your relationships. Suggesting a written contract can, in itself, cause problems between you and your family member, as they may question your trust of them.
Even if you can get the agreement in writing without problem, if you end up having to pull the contract out in order to get the debt paid or resort to legal action, the relationship will never be the same.
Wanting to help family, or even friends, who are in a financial bind is not a bad thing. Your heart is in the right place, but this is not a decision you should make with your heart. If you really want to help (and can afford it), a gift is a much better option. There will be less pressure on the relationship if you they are not indebted to you. Whereas a loan leaves room for a long period of time where you think about the money they owe you whenever you see them, a gift is a one and done kind of deal that you can give them and then let go.