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5 TIPS FOR LOANING MONEY TO FAMILY


Lending a helping hand and a few well-placed dollars to a family member during challenging times is an all too Canadian thing to do. However, there may be emotional and financial pitfalls firmly attached to your largesse.

Family loans are fraught with peril with many feeling obliged to lend money they really can’t afford. When borrowers default on the loan, the situation becomes uncomfortable and emotionally driven from both sides.

Before shelling out the cash, taking time to properly evaluate the situation and your own financial well-being will ensure neither party is left with the awkward aftermath. Here are her top tips for navigating the waters:

1. THINK BEFORE YOU ACT.

The biggest mistake is to say ‘yes’ before thinking it through and loaning money that has been set aside for retirement savings, a mortgage payment or living expenses. Be sure to assess your own needs so your financial security is not put in jeopardy.

2. HERE TODAY, GONE TOMORROW.

Don’t loan money you expect to get back. Chances are, unless it’s a formal agreement related to a business, you’re unlikely to see the cash again. Only loan money you’re sure you can live without.

3. IT’S NOT JUST YOU.

Be sure to discuss any loan requests with your spouse, especially if the money is coming from the family pot. You must both agree to the terms so that if the deal goes south, along with your money, strain on the relationship is minimized.

4. GET IT IN WRITING.

Put the terms of the loan in writing so that there is no miscommunication about repayment terms. Both parties must treat the loan like a business transaction, not a handout.

5. IS THIS THE END?

Before lending money, know your own emotional constitution and how you and your spouse will react if the money is not repaid. Will it end your relationship with a sibling or friend? Is the loss of the relationship worth it, even if you can afford the loan?

A financial planner can help separate emotion from fact and identify the long-term implications of loaning money to your overall financial plan. It’s hard to say no to family, but if you have to turn them down, tell them why.

If you’ve already loaned money that you’re having trouble recouping, have an honest discussion. It may be a temporary set-back that can be remedied. Not talking about the elephant in the room will only make that elephant bigger.

Discipline is what it takes to block out the noise, commitment is what it takes to walk the path to financial success and patience is what it takes to reach the goal.


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