Family Money Management - Advice for Borrowing and Lending Within Families

Articles on family money management advice usually dispense information about spending, saving, and investing . But there is another part of money management in families that is important and that is lending and borrowing.

If you have ever loaned money to a family member and they failed to paid you back, you are undoubtedly familiar with the damage to personal relationships that can result from borrowing and lending of money between family members.

It is only natural that family members might want to help each other out by lending money if they are able. After all one of the functions of a family is to share resources. The complicating factor with money lending is that there are emotional relationships involved that can be affected by the emotional tensions created by the loan.

Sometimes the tension over defaulted loans is so great that family relationships are permanently damaged.

A finance company or a bank has no hesitation in going after the collateral for their money when someone has defaulted on a loan, but then they really do not want to ever see that person again. The same cannot be said for your family. Are you really prepared to repossess your son's electric guitar if he defaults on your loan? what about reposessing your adult child's house if they default on the mortgage payment?

Here is some family money management advice to help you avoid emotional baggage that can result from lending money within the family structure.

1. never loan money that you really need (or want) - in other words if you loan money to a family member you must be prepared to see that money disappear, forever, so that you can continue your relationship with that person. If you are not prepared to lose the money do not lend it. This has to be the prime directive for money management advice within families .
2. assess risk - it doesn't matter who the family member is who wants the loan, you must assess the risk. Why would you lend money to a person who has already been turned down by a bank? Does it make sense to loan money to a parent or an adult child who has no way to pay you back, or has a history of poor money management? Every borrower will promise to pay you back. They have to tell you that. If they said, "Oh and by the way, I do not intend to pay the money back" they know you will not come through with the loan.
3. never co-sign a loan - when you co-sign a loan you are taking on the financial risk but you do not have the financial asset of the collateral. In case of default on the loan the lending institution will come after you for that loan and you will be liable for the balance. That is what a co-signing responsibility is. It is extremely risky to have a financial liability with no collateral to show for having borrowed the money. When you cosign a loan so you child can be a car you have the liability for the loan but the child owns the car. You have nothing except the liability of the loan if your adult child defaults.
4. give your adult children money - give freely and regularly for birthdays and gift giving holidays. Give what you can afford but give freely and without conditions. This is a gift not a loan. If you have to say no to a loan request you cannot be accused of being cheap or tight with your money if you give freely. You have the right to say no when asked for a loan and you have no obligation, duty, or responsibility to lend money to your adult children or any family member.
5. formalize all loans with notarized statements - Let's say your spouse has convinced you to help out your brother-in-law. If you can afford it, and if you think he has the ability and the desire to pay you back and if you are prepared to never see that money again go for it, but formalize it with a notary public (at your brother- in-law's cost). The process of notarizing formalizes the arrangement, spells out the terms of the loan as well as the consequences of default. Remember however, that the ultimate consequence is still the same so please be prepared to never see that money again (See family management advice rule #1).

These 5 rules for family money management will help you to control your own money and reduce the opportunity for money to destroy your family relationships.