August 21, 2024 |5 min read
It’s probably happened before. Your phone buzzes, and it’s a call or text from that one friend or family member looking to borrow money. Or maybe it’s your child asking for help with a large purchase or your best friend from college is in a bind. No matter who’s asking, it can create an awkward situation.
It's easy to jump at the chance to help someone you care about, but there is a lot to consider before you respond. Start simple: Are you able to loan money? If not, how do you say no? And if you are, how do you make sure you’ll get paid back? Whether you tell them yes or no, here are a few things to think about when loved ones ask for money:
Look over your finances
If someone came to you today and asked to borrow money, how would you respond? Maybe you only loan money to immediate family members and close friends, and only when you’re caught up on bills and have a few months of savings in the bank.
Saying yes right away to family asking for money may not give you enough time to think about the situation. Before you commit, you might want to ask why they need the money and let them know you’ll need to review your finances first. To help you decide whether or not you’re in a financial position to help them out, ask yourself:
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Where would the money come from? It might not be a good idea to touch emergency savings or your 401(k), which you could be penalized for, adding to your own money worries.
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Are you caught up on all of your bills? Review your credit balances and go over your upcoming bills and current savings to make sure you can part with the cash.
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Will you still have enough savings left? If you’ll have less than 6 months of savings left over after you lend the money, you might want to hold onto it.
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What happens if they don’t pay you back? Make sure you can live without the money if they don’t repay you.
Preserving the relationship
If you’re financially able to provide a loan to family members asking for money, you’ll still want to consider whether it might hurt your relationship. Let’s say your Aunt Sheila, whom you love dearly, is asking for cash in an emergency. Here are a few questions you might want to ask before loaning her money:
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Would the relationship be strained if she doesn’t pay you back? Thanksgiving can be awkward enough without dealing with strained family relationships and financial stress.
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Will she actually spend the money on what she says she will? How will you react if, instead of using the money to pay her utilities, she uses it on something she doesn’t really need?
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Based on her financial situation, is it realistic for you to expect her to pay you back? If she’s often behind on bills, it might not be realistic to assume she’ll repay you.
Find other ways you can help
If you realize that you just don’t have the dough or you feel uneasy, it’s possible to say no to lending money to family or friends while still helping out. When you’re figuring out how to say no to family asking for money, consider telling them that while you can't swing a loan right now, you’re able to help in other ways. Here are a few ideas:
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Help them save. Brainstorm new ways to save money by outlining all of their expenses and building a budget.
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Identify expenses they don’t need. Once they’ve created a budget, help them find expenses they can cut out.
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Find them guidance. Suggest resources to help them save, like a credit counselor.
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Help them find a side hustle. Recommend ways to earn extra cash.
What to do if you say yes
Say your savings account is in pretty good shape and your bills are all paid up (nice work). Plus, Aunt Sheila has always been one of your favorite relatives, so you decide to loan her the money she needs. You can still take steps to protect yourself and the borrower:
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Create a contract. This may seem unnecessary for personal loans, but making it official may ease Aunt Sheila’s mind as well as yours. By outlining how and when you’ll get paid back, along with any interest charges you might add, you’ll be on the same page with the same expectations.
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Decide how you’ll lend the money. Consider writing a check or transferring funds instead of using cash so you’ll have a record of the transaction.
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Account for taxes. You only have to report your loan to the IRS if it exceeds $15,000. If that’s the case, and you also charge interest, be aware of applicable interest rates and report this as “interest income” on your taxes if required.
The takeaway
These guidelines can all be boiled down to a few simple principles:
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Try to create some general rules about who you feel comfortable loaning money to.
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When approached by a friend or family member looking to borrow money, ask yourself if you’re really in a position to be giving money away.
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If you aren’t, offer to help by providing advice and support.
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If you are, consider creating a contract that you can both feel good about.
It can be a challenge when friends or family ask for money. It’s okay to take your time to make a decision that respects your financial boundaries. Next time you’re dealing with family asking for money, do only what you’re comfortable with based on your own financial situation.
