Setting expectations is important when lending money to loved ones – MoneySense

When to say no to borrowing

If borrowing money puts you behind, the answer should be a straight no, says Cindy Marques, certified financial planner and CEO of MakeCents. That’s because you may not be able to get the money back, she said. “It’s fair to intervene on the basis that you may not get this money back,” she said. “If you cannot afford not to get this money back, you absolutely should not lend the money.”

Refusing to lend isn’t selfish if it’s to your detriment, Marques said. You don’t have to explain at length why you can’t, just say that you can’t afford it.

Emotions play an important role in the decision, says Brooke Dean, founder of BMD Financial Ltd. at Raymond James. “If you get angry or anxious, or if you always keep in mind that this friend or family member owes you money, that will actually affect your relationship,” she said. “You probably shouldn’t do it.”

What to consider before lending money to family or friends

But if you decide to borrow money, first understand the need for it — whether it’s to deal with an emergency, to invest or start a business, or for leisure, Marques said. Each of these three scenarios calls for a different answer. For example, if it’s just for fun, Marques suggested being wary and prying a little to understand why they need it.

It also depends on how much money is requested. If it’s an amount that would cover dinner, not getting it back probably won’t make or break you. You can consider it a gift and let it go. A larger amount, however, would require a formal paper trail detailing how much was lent and how it will be repaid, Marques said.

Dean said the language of the promissory note could be as simple as noting the amount and the expectation of when it would be returned, such as in a year or five years, and whether it would be repaid in installments or in a lump sum. People can also comment on interest on the amount, but it is unusual among friends or family to do so, she said.

Be honest: can you afford it?

Where that money comes from also determines whether you can really borrow it. “Did you take it out of your own emergency fund? Did you take it out of your travel fund?” Marquis asked. “Or did it just sit there, it’s just excess savings or investments, and you didn’t have a specific purpose for it?”

Taking money out of your emergency fund means you can’t afford to treat it like a gift and you want it back as quickly as possible. For money that doesn’t have an urgent need, the timeline for recoupment may be a little longer. “It’s very subjective and you have to look within and decide for yourself: Does this money have a purpose and a time?” Marquis said.

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You may have rescued your loved one a few times before without seeing the payback, and there’s a risk this could become a pattern of exploitation, experts warn. Marques recalled a client who was burned by a family member, but the client brushed it off. Soon, more family members started approaching her for money, knowing there is less pressure to give it back.

“She was not in a financial position to lend money to anyone, but she felt pressured as if it was her job to do so,” Marques said. “I had to remind her, ‘No, absolutely not… When I look at your finances, it’s very clear that this is hurting you and you just can’t afford it.'”

Dean said people should watch out for warning signs, such as a history of loan defaults or bad habits such as addiction or gambling. Thinking about questions like how well you know this friend or family member and whether you trust him or her can help you determine whether you want to help again.

Often, she said, people have to put their foot down and step back to enable the behavior. “Unfortunately sometimes that affects the relationship by not lending the money, which can be difficult,” Dean said.

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