I was sharing advice about how to get your financial house in order with Wendy and her audience. The conversation turned to how to handle the pressure when loved ones ask for a loan. Wendy got serious and made it clear that lending to someone you love can put a lot of pressure on a relationship. She said in order to preserve the peace, think of the money as a gift—no strings attached—because you may never get it back. Even though I was the expert guest, her point was well-taken and it was great advice we should all take to heart.
Almost everyone has a story about being asked for money by a loved one. Black people have even bigger challenges dealing with these pressures. According to a survey by Prudential Research, African Americans provide financial support to extended family at a higher rate than the overall population.
Analysts say that’s because blacks are much more likely to have struggling relatives due to the high unemployment rate in the African American community or on the losing side of the wage gap.
If you find yourself struggling with the pressure to lend, money coach Tonya Rapley shares five tips that may help.
1. Don’t be an enabler: Emergencies happen to all of us, but if your family member is continuously in a state of financial emergency, serious questions and conversations need to be held,” says money coach Tonya Rapley. Bottom line: If your relative is unwilling to talk about living beyond their means and create a budget, you are enabling. They will end up in more trouble down the road.
2. Look at your financial situation: If you’re struggling to make ends meet and don’t have enough money in an emergency fund to cover six months of living expenses, you can’t afford to lend.
“You don’t want to be the reason a family member suffers hardship, but you also don’t want a family member to be the reason that you experience hardships whether that be financially or emotionally as a result of the arrangement,” Rapley says. You should also never tap into money earmarked for retirement and education savings. If your relative does not understand this you should probably be having a different conversation.
3. Know yourself: Many financial planners tell their clients never to lend, but it’s you who must look in the mirror after the fact.
Think about how you would feel if you didn’t help your parents when they needed it? Are there things you can do besides giving them money such as helping them find a financial planner or create a spending plan?
Experts say it’s also important to ‘get real’ with why you’re lending the money. Psychologist Jeanette Raymond says, “When we help someone in need, we get a rush of dopamine that is the same as the release when we feed an addiction. We’re chemically wired to be drawn to situations where we can rescue someone. It’s very hard to stop.”
4. Be realistic: As Wendy said, if you decide to give your relatives money, realize that you are unlikely to get it back. Think about it: The borrower not only has to increase their cash flow enough to take care of themselves, but they must have enough of a windfall to pay you back too. Despite their best intentions, it’s wise to make the loan a gift. Check out the IRS codes for gift giving. If you can’t afford the gift, you can’t afford the loan.
5. Remember, it’s not just your decision: Make sure you discuss lending money with your family and other dependents before you make the loan. It’s not just your financial well-being that’s at stake. You should not only discuss the impact on your family budget, but also talk about how other family members feel about lending to the person who is asking. You will be glad you are not solely responsible for the outcome.
If you decide to go ahead with a loan, set clear terms for repayment. I’ve spoken to many people who actually charge interest on these loans. Regardless, you may want to buy a contract template online or at an office supply store. Also, make it clear to the borrower that they should give you an agreed upon notice period if they are going to miss a scheduled payment.