9 things to consider before loaning money to a loved one - WICU12/WSEE Erie, PA News, Sports, Weather and Events

By Andrew Housser

Perhaps the only thing more difficult than watching someone you love struggle financially is having that person ask you for money. Saying "I'd rather not" can be hard to do, no matter how able you are to help. But handing over your hard-earned cash -- at the risk of never seeing it again -- is equally difficult.

Chances are that this relative or friend has come to you because they cannot secure the money through a more traditional route, such as a bank loan. While that alone may be a red flag, it still can be prudent to help out. Weigh these considerations in making that decision.

1. Get the inside scoop.

You have a right to ask what your money is funding. If your family member or friend has racked up debt and is borrowing from you to pay it off, how do they plan to repay you? Only you can decide what is loan-worthy. However, for a large loan, the purpose should be concrete, such as replacing a car, financing a college education or putting a down payment on a house. If the person making the loan request is offended or refuses to share this information, reconsider the request. 

2. Be prepared for the loan to be permanent.

It can be difficult to recoup money if a relative or friend reneges on paying back your loan. You should only loan money if you are comfortable with the idea that you might never see it again -- and if you can comfortably afford to live without it.

3. Don't jeopardize your financial security.

Lending available cash from your checking or savings account is one thing. Never dip into retirement funds or emergency funds or take out a cash advance on a credit card to help out someone.

4. Keep others in the loop.

If you are married or in a relationship, consult your spouse or partner about the loan. You can still lend money even if your spouse disagrees, but be aware that doing so can put serious strain on a relationship. It is also helpful to let at least one other family member know about the loan. This may make the borrower more inclined to make good on the repayment. Plus, if something were to happen to you, the borrower would still be held accountable for repaying the money to your family.  

5. Don't enable.

If a request for money comes from someone who is emotionally destructive or who is always in financial hot water, consider providing emotional support only. Additionally or alternatively, suggest they contact a reputable source of debt help so they can learn to manage debt on their own.

6. Consider the precedent you are setting.

Perhaps you are comfortable loaning money to an adult child who has always been responsible and worked hard, but not to his or her sibling who spends frivolously. Saying yes to one family member and no to another can cause major family rifts.

7. Charge interest.

A fair interest rate encourages the borrower to pay you back in a timely manner. It may also protect you from being charged gift taxes on the money you lend. If you lend more than $13,000, you must pay a gift tax unless you get the loan terms (including interest rate) in writing.

8. Sign a promissory note.

You and the borrower should treat this loan just as a bank would. That means drafting an agreement that details the loan amount, interest rate, repayment schedule and late fees. You, the borrower and an impartial witness should sign and date the document. You might also want to have it notarized. In the event that legal action becomes necessary, this document can prove helpful in court.

9. Distance yourself.

Once the borrower has agreed to the loan terms and you have handed over the money, remove yourself from the situation. Do not question your borrower's spending habits. Of course, it is appropriate to inquire about plans to repay you if payments are late.

Money can drive a wedge between even the closest family members and friends. If you do not feel you cannot meet a particular request, or are comfortable doing so, give yourself permission to say no. After all, you've worked hard to earn and save your money, and you have your own financial future to consider, too.

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.