Avoiding the Family Lending Trap

The other day, I calculated that if my husband and I had agreed to all the requests we’ve received over the years to cosign loans for family or lend them money, we’d have over $100,000 in family-related debt. I love my family, but realizing how far under we’d be if we hadn’t turned down their requests doesn’t give me a very warm and fuzzy feeling.

It’s hard not to give in when a family member needs or wants something. We want them to be happy, plus we want them to love us. Unfortunately, most of us are barely able to keep our own financial boats afloat, let alone continually bail family members out of trouble.

My husband and I know better than to loan money to family, but a couple of weeks ago we compromised our principles. Our adult son needed car repairs and was short on cash due to his recent purchase of the car. We fronted him a few hundred dollars for auto parts, and since he lives with us expense-free, has a good job, and has few other expenses, we presumed he’d pay us back out of his next paycheck. When his next payday arrived, we received a harsh reminder that family members are typically not in a hurry to pay back what they owe. Although you were the good guy when you lent the money, you quickly become the bad guy if you ask for what is rightfully yours. This was a good refresher for us, and it’s a lesson I hope we will not need to relearn in the future.

There are a few acceptable reasons to loan money to a family member such as if they are normally responsible with their money but run into hard times due to a serious illness or accident, but those situations are few and far between. In the vast majority of cases, it is a bad practice for several reasons:

Experts recommend against it. If respected members of the financial industry repeatedly warn against doing business with my family, who am I to argue?

It can ruin a relationship. When someone owes me money and doesn’t pay me back, I think less of them -- especially when I see them buying toys and luxuries rather than paying me back.

It's too big of a financial gamble.  If the person hasn’t saved money on their own or can’t get a loan from a bank, clearly they have financial management issues and are not a good risk. If I want to gamble, I may as well go to Vegas.

It can wreck your credit.  I’ve spent a lot of time building up my credit, and if I cosign a loan for a family member who skips payments, all that hard work will be down the drain. Plus, if I need to get a loan myself, I may not qualify due to my obligations to the cosigned loan.

Personally, I can’t afford it. I have my own monthly expenses and savings goals. If I lend money and it doesn’t come back, my own forward progress may be halted.

I may never feel completely comfortable denying a family member’s request for financial help, but I’m going to stand firm from now on. I love my family enough to say, “No.“