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Personal Finance, More than Math-Part 2: Loans to Friends and Family

Updated: Dec 10, 2021

As we covered in part one of this blog, money is more than math. It's also personal and emotional. You can find part one here.

A very emotional decision people face is whether or not to help out our friends and family with money. If it hasn't happened to you already, someone you care about will likely ask you to borrow money. It's difficult to say no to people we care about, but in all honesty loaning money to friends and family risks putting your personal relationships in peril.

When you loan money to friends and family, your relationship with them changes. The money that is owed will always put a fog around your interactions. Until the moment the loan is paid back, that will remain. Oftentimes, these loans are not paid back or they are not paid back in a timely manner which causes tension and can even end friendships.

Think about it for a minute. If someone is struggling to pay who they owe already, loaning them money means they will be struggling to pay you. It's easy in this situation to blame the person for not paying, but the person making the loan has some blame as well because that person has obligated someone who was already struggling with money to pay them. When you think about it logically, that doesn't make sense at all. This further emphasizes that money is not just about logic. You love your friends and family, therefore it is more difficult to be logical. When it comes down to it, you do not need to be loaning money to your friends and family. The risk to your relationships is just too great.

So should we never help people out with money? It's not automatically wrong to do so, but when you help someone with money, don't loan it to them. GIVE it to them! This takes away the obligation and the tension.

Of course there are a couple things to consider before doing so:

Would giving the person this money enable them to continue bad habits?

If so, you are not helping, but hurting them. Ask questions about their situation. They have asked you for your money, there's nothing wrong with you asking about their situation. If they are struggling with something like addiction or irresponsible spending, you definitely wouldn't want to enable them to continue that.

Is the amount you are giving money that you can afford to lose?

Just because you have the amount they're asking for in your account doesn't mean you can afford it. Do you have an emergency fund of 3 to 6 months of expenses? Are you saving up for something you need and you would be set back? Does the amount make you uncomfortable? If so, you need to kindly say no. Consider helping in a different way like giving them a ride or giving them a place to crash for a few nights if they need it.

If all checks out and you want to help, then give it to them free and clear. If the person you gave money to really wants to give it back at a later date, that's fine. You gave it as a gift, so there is no issue.

Cosigning Loans

There is a variation on this theme that is common-cosigning loans. When a person does not have good credit they cannot get a loan on their own. In order for them to get a loan, the bank will require a cosigner. When you cosign for someone, you are not just vouching for them. You are saying that you are liable for the loan in the event the primary signer does not pay it. If a cosigner refuses to pay or cannot pay, his or her credit will be wrecked as will the relationship with the person cosigned for.

Banks are dying to loan people money. If they have determined that your friend or family member should not be given a loan, then you do not need to be putting your name on the line. Either give the money or stay out of it.

Money Affects Relationships

Money would be easier to deal with if it wasn't for the personal/emotional side of it. It's one of the challenges of life that we have to deal with, but it's one we must be able to handle if we want to be successful. Most people are living paycheck to paycheck. If you are one who is perceived as having it even slightly together financially, people will ask your for money.

If your name is not something like Arvest, Bank of America, or Chase Bank, do not be loaning people money and by all means do not be cosigning someone else's debts. Your relationships and finances are not worth the risk.

If you are struggling with money or someone you know is asking you for money, reach out to us, so we can build a plan to turn the situation around. Your pocketbook will thank you!

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