You May Want To Think Twice Before Loaning Money To Family

Lending money to a family member may seem like a thoughtful or even an obligatory gesture if a loved one is in a financial jam, but as the old proverb tells us: "The road to hell is paved with good intentions." Consider a 2022 survey by CreditCards.com, where 59% of survey respondents reported a bad outcome as a result of lending money to friends or family members. A full 42%, meanwhile, mentioned losing part or all of the funds that were loaned, while 26% reported that the transaction negatively affected their personal relationship with the borrower. Perhaps most alarmingly, 9% of these amateur lenders said they got into a physical scuffle with the person who owed money.

Fittingly, most personal finance gurus recommend against loaning money to family and/or friends because the chance of a negative outcome is so great. Said Ted Rossman, a CreditCards.com senior analyst, "If you want to do this, don't lend more than you can afford to lose." What happens if the funds aren't repaid? The aforementioned survey found that 39% of the respondents would attempt to collect the money, while an equal 39% would let the debt go unpaid rather than be confrontational.

Some instances when a family member might ask you to borrow money include for emergencies, of course, but other propositions might revolve around that person's lack of a credit history (or perhaps a bad one) that prevents them from getting approved for a more conventional loan for a car, starting a business, or just about anything.

Resist the pressure to cave-in right away when asked, and consider how a loan will affect your own finances. If the money doesn't get paid back to you on time, or at all, would that put pressure on your own budget? On the other hand, if you have a stout emergency fund with three to six months' worth of living expenses squirreled away, along with a stable income and no debt, then you might consider helping that family member out with a loan.

Even in a best-case scenario, though, lending money to family members has pitfalls. Besides the potential of not getting paid back and the strain that places on a relationship, there may also be tax implications for both the lender and borrower. For example, on larger loans — defined as $10,000 or more — any interest that's collected is considered taxable income for the lender. Additionally, if any portion of the loan is eventually forgiven, the borrower may be responsible for paying a gift tax.

Besides whether or not you can afford to grant the loan, also consider the borrower's history. If the person is typically responsible and might be facing a unique crisis out of their control, they might not be a bad credit risk for getting repaid. On the other hand, if the borrower is known to have a casual attitude about money and flippant spending — or has approached you or other family before for a loan — it's probably not a good idea.

If you're not confident about making the loan, then be firm about saying "no." You might get some argument or resentment from the borrower, but you could try to salvage the relationship by offering some helpful alternatives. Those suggestions might include opening a credit card with a low (or even 0%) promotional interest rate or even letting the person do some small tasks for you to earn extra cash.

In a nutshell, don't lend money to someone known to be financially irresponsible, even if they're flesh and blood. Also, don't lend more money than you can comfortably afford to lose, and don't let the borrower guilt you into a bad decision. Finally, if you do agree to loan out money to a family member, you should mentally treat it like a gift. If you get paid back, that's great. It'll likely elevate your opinion of the borrower's character. But if not, you'll be prepared and the indiscretion won't cause a rift in your relationship.