Family Borrowing and Lending

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Some of you may have cringed just by reading the title of this article. Either you lent money to family and are still waiting to get it back or you know someone with a sour experience of lending money to family. If you asked me about borrowing or lending to family, I would probably advise against doing so. However, I’ve realized that this situation has actually been a frequent occurrence with family for various reasons.

House renovations

We bought our condo a month before we moved to Canada (we’re only here for 7 months and friends are currently renting it while we’re gone). The month before we moved was spent renovating kitchen cupboards and tearing down yellow textured wallpaper from 1977. After we left, my parents graciously offered to do some finishing touches and they paid for it out of their own pocket. Purchases they made were discussed beforehand and it was mutually understood and agreed upon that we would pay them back. They kept the receipts, scanned a copy of them to us, and we transferred money online to their bank account.

In-laws visit Canada

My husband’s parents came to visit for a week and stayed with us in our apartment. We slept on an air mattress in the living room to save them a lot of money from staying in a hotel and renting a car. Instead of taking a hit from transaction fees and currency exchange rates, we offered to pay for every meal and activity on our credit card and withdrew cash for them to use when we weren’t with them to pay for things. Again, we kept all the receipts and my in-laws transferred their half of expenses to our bank account when they got back home.

Car License Renewal

This was a smaller lending situation, but still counts. We did not opt to have our mail forwarded to Canada so when our license renewal came in the mail and we weren’t able to renew it online, my mom wrote a check for the cost and mailed it in for us. Again, she sent me the cost and I transferred the money to her account the next day.

Phone bill

My dad gets a 25% discount on a family phone plan through his company. When my husband and I got married, it was way cheaper to add him to the existing family plan instead of starting a new account for the two of us. I simply schedule quarterly payments to my parents’ bank account before each quarter starts so we’re paying in advance. My bank charges $0.99 any time we transfer money online from one bank account to another but this minimal expense is worth it to me since I don’t have to remember to write a check and it makes one less trip to the bank for my parents to make.

Things to note:

There will be a lot of case-by-case arguments on this topic. I know some parents who loan their children money for college, house, or car payments to avoid the cost of interest, but I’d stick with my opinion of not borrowing or lending large sums of money to family or friends (however, even the word “large” is a relative term, so that’s not exactly a helpful statement!). I would definitely advise against lending or borrowing money for an unnecessary or non-urgent situation. For example, when my 20-year old cousin asked my dad to cosign on a loan for a car, my dad’s response was “Absolutely not.” Don’t put yourself in a position like this. It’s one thing to spot someone knowing you’ll be paid back next time you see them but much more is on the line when long-term or large commitments are made. If you are financially able to help a family member and the cost won’t hurt your own financial status, would you consider simply offering it as a gift? We’ve given $600 as a gift to help a sibling out when money was tight and car troubles arose because we were financially able to do so. We know this sibling would pay us back, but it was nice to relieve the pressure of feeling indebted and the potential of placing a burden on our relationship.

What are your thoughts on family borrowing or lending? Any positive/negative stories to share?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

16 Comments

    • That seems wise. Even if they get upset you won’t loan them money I don’t think it would have as much damaging potential if you did lend the money and have trouble getting it back down the road.

    • In some situations family loans can actually benefit both the lender and the borrower. Just make sure that you agree on a fair interest rate and that you sign the proper loan paperwork.

      The paperwork is a must because it makes it “real” for both parties and it also eliminates the appearance of unfairness (say you have 2 siblings and your parents are giving you a loan). If you don’t pay the loan back then that money will come out of any inheritance you were entitled to.

      If your family member has the money sitting around then getting paid a decent interest rate (say 5%) would be advantageous to them. It could also save you a substantial amount of money if you have debts at higher interest rates that you need to pay off (say you have student debt at 6% or credit card debt at 20%).

      • I agree with the paperwork. We did that with friends go are currently renting our condo for a few months while we’re in Canada for my husband’s work. Hopefully family or friends won’t take your request for a paper document as a sign that you don’t trust them. I’ve heard both ways!

  1. Am totally with you here Jessica, family inter-lending is like walking on thin ice…you never know when it might crack. Asking for the money back is usually a nightmare if you can even pluck the courage to do so and leaves r/ships strained.
    As you point out though, there are special circumstances when one can and should consider it and not all family members are “irresponsible” with repayment.
    Simon @ Modest Money recently posted..5 Blog Link Building Strategies To Now Avoid

    • You’re right, Simon. It’s just hard to figure out if those potential borrowers are responsible or not!

  2. About 20 years ago. I loaned $2400 to my older brother when he was building a new house. He had run out of money, but needed to pay for a delivery of lumber as well as pay his workers. We called it a loan, but I figured it was a gift. He sold the house about 10 years later and actually paid me back the $2400, with no interest, of course. I would never co-sign a loan with anyone, though. Chances are good that your credit will get hurt, your relationship will get hurt, and you will get stuck repaying the loan.

    • Did you or your brother ever follow up on that loan or was it not until you got the money back? I’m definitely with you on not consigning a loan.

  3. Sometimes, it really just depends on the person and on the situation. If they’re someone I know and trust and if they need it so badly, I’m definitely going to let them borrow money from me but it’s not going to be a big amount of course.

    • It is case by case and even “big amount” can be interpreted differently. I’m not sure how much is “a little” if my sister asked to borrow “a little” money. To me, I may think $100 but she could be thinking a couple thousands!

    • My only situations of borrowing have been with parents since the sibling got money as a gift but you’re right- so far, so good! It helps that our families are open to talking about money and we generally know where we all stand and our history of making payments. I’m sure witnessing us pay off $30k of student loans in 9 months showed them we meant business when it comes to borrowing!

  4. My parents lent me money for college and it all went very well, but I was always wondering what they thought of the way I was spending my money when I still owed them so much.

    My vacations were a little less fun because I felt guilty about spending the money. After all, it could have gone to them. So while they never said anything about my spending habits, it always weighed on my mind a little.
    Derek recently posted..Family Borrowing and Lending

    • You sound like my husband! Dave’s mom recently told me how mindful he was of spending his parents’ money growing up and he very often verbalizes his thanks for past and current financial gifts. I’m more like you now with family vacations- my parents tend to front the money for the hotel and pay for groceries but we make sure to chip in a good chunk since we know other siblings aren’t in a position to do so.

    • Very true. I’ve had a couple friends and even coworkers visit my website to learn how to budget wisely to prevent any family/friend borrowing situation down the road. I’d be happy to point my family to helpful resources which can help them out more in the long run!


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