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What To Do When a Family Member Asks You For Money

What To Do When a Family Member Asks You For Money

For many people, these are still very tough times, or others are starting to see the light at the end of the tunnel and are contemplating moving forward, such as buying a house but need money for a down payment. There could be any number of reasons that family will turn to you and ask for a loan.

Do you say yes or no and what are the ramifications? Much is at stake. If things don't go well, not only might you be out of your money, but your relationship will no doubt suffer as well.

Loaning money to family can be complicated. Here's how to handle the request that will likely come, sooner or later.

Ask tough questions

You should ask yourself a few questions. For example, are you close with this family member, are they trustworthy, if they can't pay you back in a reasonable time, how will that affect your finances?

“Being a family means helping out in tough times, but it is important to understand that there are repercussions to loaning family members money, especially if they are unable to pay your back,” warns Leslie Tayne, a financial attorney specializing in debt with the Tayne Law Group.

Determine if you're being asked for a loan for a good reason. “Is there a bona fide crisis – a true emergency through no fault of the borrower, they are just in a touch time? If so, chances are likely that you will get the money back,” says Mary Kelly, author of Money Smart: How Not to Buy Cat Food When You Don't Have a Cat.

If borrowers are making an investment and need capital, such as buying a house or starting a business, have payments made electronically so they can be tracked by both sides, says Kelly.

What's not acceptable, she says is loaning money for luxury goods such as a television, boat or new phone.

Basically, like in Vegas, “Don't risk more than you can afford to lose. Loaning money to friends or family is a gamble, so never make a loan if it's going to put your own financial situation on the skids,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling.

Think twice about co-signing a loan

“You will be solely responsible for that debt in the event that the debtor fails to pay, which could impact your credit in the short and long term,” says Tayne. Instead, consider a regular money loan so you can maintain control over the terms and impact on your credit. If you dare cosign, always maintain control by making sure you are given monthly statements and access to loan information at all times, says Tayne.

Find out if there are possible tax implications

The IRS frowns on loans that charge little or no interest and may require you to pay a gift tax. Before loaning more than $10,000, talk to your tax accountant to ensure you are protected, says Cunningham. If the borrower defaults on the loan, document your attempts at collection so you can write-off the loan, she adds.

Put the agreement in writing

The first thing to do when thinking about lending money to family is to treat it as if it were business, says Tayne. “Put in writing the debt and terms so everyone remains on the same page and nothing is left unknown,” she says. Having the agreement in writing should help avoid future issues or conflicts that could potentially ruin a relationship.

Both parties should be willing to have the loan in writing. The contract should spell out your expectation for when the money should be paid back. You can even consider setting up a payment plan that lays out how much you expect them to pay back month in order to pay down the loan. Although this is a personal agreement, treat it like a business agreement, and make sure a clause is established that addresses what will happen should the loan not be paid back, says Tayne.

Assess how the loan impacts others

Like with other big decisions, you surely want to get your spouse or partner's input on giving a loan. Communication could not only save you money, but could save your marriage or relationship. If you and your significant other don't agree on making the loan, it could result in significant stress in your relationship, warns Cunningham.

Then too, say you're providing a loan to one of your children, how will the others feel, like the bank of mom and dad is open for business? Maybe you're lending to Johnny who is responsible, but what if the same could not be said of his brother who may feel like he now has an opening to ask for money too? “Be prepared to deal with the potential strife such a situation could create within the family,” says Cunningham.

For sure, families have to look out for one another, but if you hand over money, do so carefully. In the end, you have to take care of your home first.

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Ally   |     |   Comment #1
Under tax implications you use the figure $10,000. The gift implications do not start until after $14,000. 
paoli2   |     |   Comment #2
We're allowed to gift up to $14,000.00 annually to our kids and they don't have to report it nor do we.  What is the $10,000.00 you are referring to under tax implications?
spo4deals   |     |   Comment #3
Regarding the tax implications,he is talking about to possibility of having to impute interest on below market loans.  To do this you would have to refer to AFRand IRC Sec 7872.