Many of us have been in this place at one time or other in our lives. We are in a difficult spot financially. A parent or other family member offers to help us out. “Just pay me back whenever you are able.” is often as defined as the agreement may be.
Or perhaps you have found yourself on the other side of the fence. You have a child or a sibling that is struggling and in need of help and you have been blessed with a surplus. You love them and want to help.
Is it ever ok to lend to or borrow from a family member?
The problem is there are many ways for this scenario to go wrong, and really only one where it goes right.
Changes the relationship
The rich rule over the poor, and the borrower is slave to the lender. Proverbs 22:7
If you are a Christian I believe this is a verse you need to take seriously. While the Bible never indicates that borrowing is a sin, it consistently notes that borrowing is unwise. One of the prime reasons for this is when you borrow you make yourself a servant of the one that you borrowed the money from. You are no longer free. It changes the relationship. No matter how sweet Granny is, you will feel differently around her if you owe her money.
Why do you need the money?
If you are in need of a loan it is very important to stop and ask yourself why?
Have you had a recent setback? Maybe a job loss or an unexpected medical situation? Were you doing ok financially until you hit that speed bump and you just need some temporary assistance to get back on your feet? If so a helping hand from a family member may be appropriate.
Or is money a constant struggle? Are you disorganized and have never really had a budget? Are you consistently spending more than you make? If your financial problems are due to poor choices in your personal finances, will this loan really help or is it just a stop gap and 6 months from now you’ll be needing more money?
Looking at this from the other side if you are the one who will be lending, you need to seriously consider whether you are really helping. You would not consciously do harm to a loved one, but when you enable their poor decisions by bailing them out, you really are doing harm to them. Sometimes the best thing we can do, painful as it may be, is to allow our loved ones to hit bottom, if that means they are forced to face their poor choices and make a change for the better.
Are you making a poor decision?
Along those same lines, why is it that you need a loan for what you plan to do? Are you biting off more than you can chew?
Perhaps you are trying to buy a home or a car that you really can’t afford. Perhaps you are looking for help in a business deal but an outsider looking in could easily see that the deal is doomed to fail.
If you have tried to borrow from a bank but they turned you down, take this seriously. There are probably very valid reasons for this. Circumventing their decision by going to a family member is very likely to put your family member in a bad situation when the deal goes south.
Do you want to open the door to boundary issues?
This relates back to the borrower/slave issue. When you owe someone money you open the door to potential boundary issues. Dad loans you money to fix your car. He then comes over a few weeks later and sees you have purchased a new TV. The natural reaction for many would be to wonder. “how you can afford the TV when you owe me money?” This can be very divisive in a relationship.
What happens if you are unable to pay?
You are struggling financially now anyway. You wouldn’t be looking for a loan if that were not the case. While your intentions may be good, what will happen if you are unable to repay the loan? So often we make our financial decisions based on everything going according to plan, but life rarely works that way.
Will you be creating a financial hardship for your loved one if you cannot repay?
If you are on the lending side, are you willing to forgive the debt and consider it a gift if your loved one fails to pay it off?
The bottom line are you willing to take the risk of this loan permanently damaging or even destroying the relationship you have with your loved one? I believe this is the ultimate reason why borrowing or lending to family members is a bad idea.
So what is the alternative to borrowing from a family member?
There is nothing wrong with helping a family member in need or receiving help from a family member. In fact I think we have a Biblical duty to help those that are in need of help. Certainly this is true within our family. But how do you do this without wrecking a cherished relationship?
Consider your alternatives
If you are in need, have you considered other alternatives? Is there something you could sell? Is there a way you can reduce expenses? Are you currently living on a budget? Could you get a second job?
Make it a gift
If you truly are just going through a rough patch and need a helping hand to get back on your feet, would your family member consider just making it a gift? If you have money and have a family member in need would you be willing to give them a gift to help them, no strings attached? That last part is the key because even gifts can cause problems if they cause boundary issues.
Consider a matching program
If you are looking to help a family member that has made poor decisions but is truly trying to change, consider a matching program. “For every $100 you raise toward this goal, I’ll give you a $100.” Pay for them to take a class like Financial Peace University as a prerequisite for getting help. Things like this can help encourage them toward more positive financial behaviors.
Get it in writing
Lastly, if you insist on borrowing from or loaning money to a family member, make sure you get the agreement in writing. How much is being borrowed? What are the expectations for repayment? How much are the payments? How long is the term of the loan? What happens if a payment is missed? We would never think of borrowing from a bank without having the terms in writing, but when it comes to family members we assume everyone understands. But memories can be faulty and a lack of definition is often what causes these loans to end with a damaged relationship.
Borrowing from a family member is almost always a bad idea
The bottom line to me is that borrowing from a family member is often a very bad idea. The risk of damaging such an important relationship is too great. It is simply not worth it.