Some people will tell you to never loan money to family. This belief is understandable; loaning money to a family member will almost always cause some sort of strain on the relationship. However, there are certain times where it may be acceptable to loan money to a family member. If you choose to make the loan, there are a few rules you should follow. Here is a brief how-to guide.
Before you lend money to a family member, sit down and talk with him about his options. If it is possible for him to borrow the money from another source, have him take that route instead. Home equity loans, car title loans, personal loans, or educational loans are all good options to consider before borrowing from family. Your family member should only look to you for money if he has considered all of these options first.
You will also need to sit down with your spouse (if you have one) and go over your own finances before deciding to lend money to a family member. Can you afford to lend the amount asked? What will happen if you don’t get the money back? What will happen if the family member pays you back over several years? Is your spouse comfortable lending money to this family member? Is this family member trustworthy? If it doesn’t make sense financially for you to loan the money, don’t do it.
If you decide to loan money to a family member, always write up a small contract with the terms of the loan and have it signed by both you and your family member. This contract should include the original amount of the loan, the date the money is expected to be paid back in full, payment options (if applicable), interest rates or loan fees (if applicable), and penalties for failure to comply with the loan terms. You should also include a brief description of the course of action that will be taken if the family member fails to repay the money. You can be as harsh or as lenient as you would like in the contract, but be sure that the terms seem fair to you. After all, it’s your money.