Lending money to family or friends can be an awkward decision. On the one hand, you want to help out a loved one in need, but will you ever get your money back? If you want to help, but think that helping them out with a loan will only make things worse, then here are some things that can help improve a stressful situation.
Give a smaller gift
If you don’t feel comfortable lending money to people in your life, then consider gifting them a more acceptable amount. When you give a gift, you’re not expecting to see the money again, so you don’t have to figure out a payment plan or worry that they won’t pay you back.
By giving a smaller amount, you won’t be putting your finances in danger when giving a smaller amount. Also, by making it a gift, there are no strings attached, so there won’t be any reason for hard feelings down the road.
Offer to help with a budget
If you honestly feel like this is a situation that will repeat itself, then you may want to offer help with budgeting. Perhaps you could show them how you’ve been able to improve your finances with some simple tricks.
If they don’t want to open up about their finances with you, you could offer some other helpful gifts:
- Quicken: This is a great piece of software and if they are tech inclined, it could help their finances tremendously by streamlining it. They can do cash flow projections, budgets, and track their investments and savings. It’s a very handy gift to share.
- The Total Money Makeover by Dave Ramsey: This is a wonderful guide on how to get out of debt, get started on savings, invest for retirement and college, etc. Dave Ramsey’s method works, so if you want to help jumpstart someone’s finances, this is a great book. I’ve given this book out to others and, while some don’t follow it (“it’s too hard!”), many of them have picked up some tips that have helped.
- I Will Teach You to Be Rich by Ramit Sethi: This book, like The Total Money Makeover, is more than theory; it shows you step-by-step how to organize finances into an extremely manageable system. There are actual scripts that can be used to get fees waived at the bank, interest rates lowered on their credit cards, and so on. It’s also very pointed, so it may be the kick in the pants that they need.
I also recommend Your Money or Your Life and The Millionaire Next Door as great gifts, but they are more food for thought. When your relative has gotten out of their current crisis, they may be more inclined to sit down and examine the big picture when it comes to money.
By giving these sorts of gifts, you’re teaching your family or friends to fish rather than buying them fish every time they’re hungry. If they respond to what you show them, then you can help them improve their finances.
Empowering loved ones to understand and use basic money principles can not only keep them from asking for money, but it can also help your relationship. They’ll be more independent and in control.
If they don’t listen, at least you’ll know that you gave them the tools to succeed. Every time they ask for a bailout, you could ask them if they used the software or read the book. You’ll then have a better idea if this is a situation where you want to help them or not.
Lend money on your terms
Perhaps you’ve decided that you want to help out by lending them some money, but you want to make sure that you’ll get paid – and that you won’t have to be the bad guy if things don’t work out as planned. Consider encouraging them to borrow via a peer lending platform.
While it might seem strange to use a third party to broker the loan, this might be the perfect solution. Lending Club can vet their application, and also help to reduce your financial commitment – after all, other “investors” will have the option to pitch in and help out.
Advise your would-be borrower to fill out the paperwork and apply for a loan. Lending Club will be able to measure objectively whether or not they are a good candidate for a loan.
What if they get rejected? That could be a sign that simply lending them money won’t help to solve their financial problems. You can then decide if you still want to go ahead and lend them the money on your own – probably not a good idea – or choose another path. It may be a jolt to their ego if they get rejected, but it’ll also give them a chance to see their financial situation clearly.
Just say no…
This can be hard to do, but sometimes saying “no” is the best way to wake someone up to their financial problems. If you think that saying no is too harsh, here’s a suggestion that can help you get your relative to a more proactive role in their finances…
If your relative is hard up for money, you might want to turn them on to SmartyPig, which is essentially a high yield savings accounts with a social component.
Not only do they give you bonuses if you’re saving for purchases at specific retailers, but they also provide a mechanism for sending gifts. Gifting a small amount into their account can be a great way for you to get them started on their way and to encourage them to save for their goals.
Your thoughts on lending to family
Have you ever given a loan to a family member or friend? If so, was it for a significant amount? How did it work out? Did you get your money back? Were there any hard feelings? And would you do it again in the future?