Setting expectations important when lending money to loved ones

When you should say no to lending

If loaning money is going to set you behind, the answer should be a straight no, said Cindy Marques, certified financial planner and CEO of MakeCents. That’s because you may not be able to recoup the money, she said. “It’s fair to step in with the assumption that you may not get this money back,” she said. “If you can’t afford to not receive this money back, then you absolutely should not be lending the money.”

Refusing to lend is not selfish if it’s going to be to your detriment, Marques said. You also don’t have to go on at length explaining why you can’t—just say you can’t afford it.

Emotions play an important role in the decision, said Brooke Dean, founder of BMD Financial Ltd. at Raymond James. “If you’re going to get resentful or you’re going to have anxiety or it’s always going to be on your mind that this friend or family member owes you money, that’s actually going to affect your relationship,” she said. “You probably shouldn’t do it.”

What to consider before lending to family or friends

But if you do decide to lend money, understand the need for it first—whether it’s to deal with an emergency, to invest or start a business, or for leisure, Marques said. Each of those three scenarios warrants a different response. For example, if it’s just for fun, Marques suggested having your guard up and pry a bit to understand why they need it. 

It also depends on how much money is being asked for. If it’s an amount that would cover dinner, it’s likely not going to make or break you if you don’t recover it. You could think of it as a gift and let go. However, a larger sum needs a formal paper trail, noting how much was lent and how it will be returned, Marques said. 

Dean said the language of the promissory note can be as simple as noting the amount and the expectation of when it would be returned, such as one year or five years, and if it would be paid back in instalments or a lump sum. People can also include language about interest on the amount, but it’s uncommon among friends or family to do so, she said.

Be honest: can you afford it?

Where that money is coming from also determines whether you can really lend it. “Did you take it out of your own emergency fund? Did you take it out of your travel fund?” asked Marques. “Or was it just sitting there, it’s just excess savings or investment, you had no particular purpose for it?”

If you’re pulling out money from your emergency fund, it means you can’t afford to treat it as a gift and would want it back as early as possible. For money that doesn’t have a pressing need, the timeline for recouping can be a bit longer. “It’s very subjective and you have to look inward and decide for yourself: Does this money have a purpose and a time?” Marques said.

You may have bailed out your loved one a couple of times before without seeing repayment, and there’s a risk of it becoming an exploitative pattern, experts warn. Marques recalled a client who was burned by a family member, but the client brushed it off. Soon, more of her family members began approaching her for money—knowing there’s less pressure to return it.

“She was not in a place financially to be lending out 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 … The math is very clear here when I’m looking at your finances that this is hurting you and you simply cannot afford it.’”

Dean said people should watch out for red flags, such as a history of defaulting on repayments or ill habits such as addiction or gambling. Considering questions such as how well you know this friend or family member, and if you trust them, can help determine if you want to help again.

Often, she said, people have to put their foot down and step back from enabling the behaviour. “Unfortunately, sometimes that does affect the relationship by not lending the money, which can be hard,” Dean said

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