Financial Matters with Your Family: When You Should Loan Money to Family or Friends

Being asked for money, especially by people you care for, can be downright uncomfortable. Maybe you're short on cash yourself, or perhaps you fear you'll never see your hard earned dollars again if you lend to this person. Still, you worry how it will affect the relationship if you turn down the request.

Lending money, even to relatives and friends, is a business transaction. Unfortunately, when it comes to doing business with friends and family, we often let our hearts lead instead of our heads, which can lead to emotional and financial pain down the road.

Before you pull out your wallet or write out that check, here are some things to consider:

#1 - Are you making this loan because you're afraid of what will happen if you say no? If someone will like you less because you won't lend them money, then they don't care very much about you in the first place. Likewise, if you're making a loan because you will feel guilty saying no, then you're not treating yourself very well either. Never be bullied into lending money by another person or by your emotions.

#2 - Are you being an enabler? Why is your relative or friend hitting you up for cash? If it's because they're living above their means, then they have a problem that needs to be addressed with self-discipline, not by borrowing from you. Lending them money will only delay their growth process.

#3 - What will happen if they can't or don't pay you back? Never lend money if you will be in financial trouble if it's not paid back. Also, consider how you will feel if they say they don't have the money to pay you back, yet you see them wearing new clothes or know they're eating out a lot? And how will they feel if they want to pay you back but truly cannot afford it? There could be a high emotional price for both parties down the road.

#4 - Do you think lending money gives you the right to have a say in the borrower's financial dealings or gives you other control in the relationship? Likely, the borrower does not want your input on what they do with the money you lend. They also probably do not plan to visit you more or behave differently because you helped them out of a bind.

If you really want to help out and you can afford it, give the money as a gift rather than as a loan. Otherwise, be honest and tell them you are not comfortable doing business with friends and family. Your candor will not only save you money, it just may end up saving your relationship.