It is the nature of
family to love and protect each other – but how
does that transfer to the financial realm? Is your family
obligated to help you with your financial debts? Are
you obligated to help a family member who is overwhelmed
with mortgage payments or saddled with massive credit
card debt? Though the answer to both of these questions
is probably no, it is a much more complicated than a
simple yes or no answer. You and your family are not
obligated to help each other with financial problems,
but most people would like to help their loved ones
with a crisis if it is within their means to do so.
When you face financial problems, it is probably tempting
to turn to family first, rather than face the impersonality
of a bank or other lending institution. But do family
and finances really mix? Financial debts to family members
can complicate even the best relationships and in extreme
situations it can result in nasty arguments and the
severing of familial bonds. Some of the most common
arguments families have are over money. On the other
hand, borrowing money from family and having that security
can ease the stress of any financial crisis. If family
members have the money you need in their savings account
and are willing to lend it to you, then why not pay
the interest to them instead of the bank?
Right from the start, you need to be realistic about
your financial situation. As the person looking to borrow
money, you should ensure that you have cut back on non-essential
expenses and have exhausted all the possibilities before
approaching family members for money. As the lender,
you must also take a close look at your financial situation
and make sure you have the money to offer to your family
member. If it is not within your means to help them,
then you must say so. There is no point both of you
going into debt just because you have the desire rather
than the means to honor the request for money. It is
hard to say no to family, but sometimes it is necessary.
Where most families go wrong with lending to one another
is a failure to establish firm guidelines and rules.
You need to be very clear from the start whether this
is a gift or a loan. If you give money without specifying
which it is (a gift or a loan), then the other person
may just assume it is a gift. If you need the money
back down the road, he or she may not have the means
to repay it, because there was no understanding at the
start that the money would have to be repaid at some
point. Even though you are dealing with your mother
or father or your daughter or your son, you still need
to treat the arrangement as you bank or lending agency
would. You need to write down the amount being lent
and the agreement you have made concerning the amount
to be paid back and the amount of time that repayment
will take. Writing it down will solidify the arrangement
and ensure that no one is taken advantage of.
You and your family should agree on a reasonable interest
rate and you should also consider arranging monthly
payments (as you would with the bank or other lending
institution). It is better to pay the money back gradually
over time rather than try to gather one lump sum.
If you are the one borrowing money, you need to make
sure that they money is used only for the thing it was
lent to you for. If you have borrowed money for the
down payment of your house, then all of that money needs
to be put into the home, not a new pair of shoes or
vacation to the Bahamas. Problems arise when family
members think that they money they have lent is being
misspent or mismanaged.
As you can see, family and finances can mix if you
take a few precautions and clearly outline the expectations
on both sides. It is worth putting in the extra effort
to prevent uncomfortable holiday dinner scenes.
MT |
