Top 5 tips for lending money to family

So your brother, mom, or cousin has asked to borrow money. What exactly do you need to consider when this potentially awkward situation comes up?

"One of the big things that comes up is the judgment associated of going to a family member for money," says Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada. "People don't necessarily feel comfortable about airing their dirty laundry.

"It's important that you as the lender be quite sensitive to that family member's situation. It's not just a strict business situation. Asking for money isn't easy, and no one wants to divulge financial difficulties because it's a lot like admitting failure."

Still, if all goes conflict-free, borrowing from family can save money as well as hassle.

"Maybe this is just a quick fix for a short period of time, someone needed money for something but didn't want to go through rigmarole of arranging money through the bank," Schwartz says.

"Truthfully the cheapest loan is probably from family. There aren't any fees to set it up or appraisal fees and sometimes no or low interest rates. But costs are less tangible."

On the other hand, things can get heated if you lend someone $5,000 and see them dining at an expensive restaurant two weeks later.

Given that family loans aren't that uncommon, Credit Counselling Canada executive director Patricia White says that the best thing people can do is to be ready for an eventual request.

"The most important factor to consider is the emotional component since there are more strings attached when you lend to people you know well," White says. "Money is personal, and guilt can set in if you say no."

To stay on good terms, be clear about terms and conditions
"Because it's family, it's important to identify upfront what each person is hoping to accomplish," Schwartz says. "There are different types of loans. If there are no strings attached, is it a gift? If it's a loan that needs to be repaid, do you want to put specific terms in place, such as a repayment plan factoring in interest.

"Or is it something even more formal, like a mortgage? Perhaps someone wants to lend $20,000 as a second mortgage on the house; that has to be registered against the title of the house.

"Maybe it's a forgiving loan—maybe you're loaning money on premise it's going to be deducted from something else later on, like an inheritance.

In other words, a loan is still a loan; White suggests writing down all of the terms in a promissory note.

Keep communication lines open among everyone affected
"Make sure to discuss the loan request with your spouse or partner," White says. Remember, your money is not always just your money so it's important to be on the same page with all stake holders. Lending money to an extended family member should not come at the expense of your immediate family's financial and emotional security. Be upfront with your plans and have all family members sign off on the plan.

Avoid putting your own financial position at risk
"It could be that it doesn't fit into your budget and is not financially feasible for you," Schwartz says. Maybe there's another option without you forwarding money, such as co-signing on a loan. So you're not just saying no but trying to find a solution that works.

Remember anything can happen down the road
"Be wary of co-signing loans, as well, since you never know what might happen to put the loan in default and put your finances at risk," White says. "Consider any precedents that a loan to one family member might set for others. And consider the consequences should one of the parties pass away before the loan is repaid. Add provisions to the written agreement."

Look for signs that you need to dig a little deeper as to why a loan is needed "This is the touchier side of things, but perhaps this person has a spending problem," Schwartz says. "It's helpful if this is addressed by a family member.

"It could be it's not just about lending money; perhaps you need to say, 'Maybe you need to see financial advisor or someone to help you. I'm happy to lend you $5,000, but if your behaviour doesn't change, you're going to be in this situation again. I'm willing to do this, but not really willing to do it again if you don't change your spending behaviour.'

Instead of ending up in crisis situation people can learn better spending patterns, habits, and behaviours to live within their means.

If you have any doubt about ever seeing the money again, White suggests that maybe considering the loan a gift is the best way to stay in a good relationship.

Then again, she points to Shakespeare's words of wisdom as another way to go: "Neither a borrower nor a lender be; for loan oft loses both itself and friend."