Lending between family members is a contentious subject. There are many things that could go wrong. Payments could be late or nonexistent. Their new business could fail to get off the ground. They could get used to being bailed out. But how do you protect yourself? Here are seven (7) things to consider before doing so.
Family Lending Consideration #1: Check Everything Out
Before lending family members money, get all their info and run a credit check through a lending API. Lending APIs are used to issue loans to customers, provide services such as credit checks, and help to ensure that the loan agreement is legally binding.
Family Lending Consideration #2: Check All Documents
Why is it that the family member wants to borrow the money?
- Is it to pay off their credit card statements? What types of purchases lead them to get so deeply in debt?
- Are they trying to improve themselves in some way? College and continuing education courses can get to be expensive.
- Do they want to open a business? Did they put any of their own money into it before asking you for help? If so, how much? Do they have all the required documentation: an EIN, registration with the state? What exactly are the funds to be used for?
- Do they need to pay off their taxes? Why didn’t they pay them off before now? Could they qualify for tax relief?
- Is life-saving a medical procedure required? What is the procedure, and why doesn’t their insurance cover it?
- Will they lose their car or ability to make money without the funds they’re asking for?
Whatever they want to do, they need to show you everything. Failure to do so should result in a hesitancy to lend the money.
Family Lending Consideration #3:
Do You Agree with What The Money’s Being Spent on?
While checking out the documents in the step above, you need to ask yourself, “Do I agree with this course of action?” If you feel the family member is going to foolishly squander the money, buy something stupid, or would give precedent for them to ask you for further funds in the future, the answer should be “no.”
Another consideration with “what” is the timeframe to pay the funds back. Will they pay you back within a few weeks to a month, or could it take many months or over a year to pay the money back? How much interest will they accrue during the loan?
Family Lending Consideration #4:
Can They Get the Money Elsewhere?
Have they tried going to the bank for a loan, getting an MCA, otherwise known as a “Merchant Cash Advance,” selling off possessions, picking up a side gig, budgeting more tightly, or obtaining a payday loan? Yes, all these things take time, but maybe they need direction, not money.
By providing them the ability to “think outside the box,” they may be able to figure out ways of getting the money without asking to borrow money from you. And who knows? Maybe encouraging them to get the funds from other sources will allow them to develop new skills, find a new passion, or be better off than if you had loaned them the money.
Family Lending Consideration #5:
Do They Have Any Savings They Can Tap?
Before asking to borrow money, family members should at least consider tapping their savings. That’s why it’s called a rainy day or “emergency” fund. Depending on how the steep expense is, they may be able to cover it themselves or ask for much less than they would have otherwise.
Family Lending Consideration #6:
How Often Have They Asked for Money in the Past?
This question really is three questions in one.
- Is the family member always coming to you, begging for money? If it happens too frequently, you may need to pull them aside and ask why they suddenly need money again. Maybe they have a drug or alcohol problem that needs addressing.
- Do they pay you back quickly when they request money, and you can help them? Even if they pay you back, if it takes forever, beware!
- How recent was the last loan? If the previous loan was too soon, you might want to think twice before lending them money again, even if they paid you back already.
Family Lending Consideration #7: Can You Afford It?
You should never lend other people money if you cannot afford it. Your survival, bills to pay, and comfort should supersede anyone requesting money from you, even your family.
Furthermore, even with things spelled out in black and white, they could default on the loan, be late with payments, or pay the principal back without paying any interest. None of these situations are ideal. Because of this, it’s best to think of the money as a gift, and if you get paid back, so much the better.
