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Should You Lend Relatives Money?

TRI 8.11.16

Our retirement savings are exposed to many different hazards. Most of the time, we

try to find ways to shield ourselves from dangers such as market risk, interest rate

risk and liquidity risk. But there’s one threat we may not even realize we’re

vulnerable to: the family or friend loan.

When People You Love Ask for Money

It’s easy to get wrapped up in another person’s drama when they come to you for a

loan. Usually, family and friends don’t ask for money unless they have a serious

issue. This can pull on your heartstrings and encourage you to act out of emotional

response rather than a rational response.

Instead of simply reacting and handing over the money, it’s important that you get a

sense of the borrower’s situation, mindset and—as cold as this sounds—their credit

worthiness. Some questions to ask can include:

  • How did you get in this position? Helping the individual determine what

happened to put them in this place can help them avoid making the same

mistake in the future. It holds them accountable for any poor decisions and

can help you determine whether they are in any shape to someday pay you

back.

  •  What is your plan for repayment? There is nothing wrong with trying to

assess whether the would-be borrower has a plan for paying you back. By

asking them this, not only can you ensure that they too see this as a loan but

you can also judge the reasonableness of their plan.

Why You Might Need to Say No

A good general rule about money is to never lend more than you can afford to give

away. That way, if the person ends up not paying you back, you won’t end up in your

own personal financial bind.

That’s good, simple advice for working individuals and those who are still a decade

or more away from retirement, but for those of us who see retirement peeking

around the next corner—is there anything we can really afford to lose? With no idea

how our investments will perform, how long we’ll live and what expenses we’ll face

during our golden years, every dollar is needed—which leaves little room for

personal lending.

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