Should You Give Money to Family Members?

Six tips to help you decide whether to lend money to friends and family.

By SHARE

The lesson: Family loans often don't get paid back, which can badly strain relationships.

• When Jay's mother had a stroke at age 50, he struggled over whether to lend her money. He was just 26, but with his job, could afford to give her some money. But he decided not to. He writes, "I know my mom. I know her history with money and jobs. I know what would have happened if I enabled her behavior." But he did pay her rent until she recovered. She ended up relocating to a less-expensive area and is making ends meet.

The lesson: Know your limits. Jay says that while his decision was difficult, he knows it was probably the best move. "Throughout my experience with my mom, she kept saying, 'I'll pay you back.' But I knew better."

[See 12 Money Mistakes Everyone Makes.]

• Julie had just turned 17 when her dad quit his job and opened a hardware store. He asked her to lend him some of the cash she had stored up from part-time jobs—money that was earmarked for school costs. She decided to lend him the money. "My parents had already provided for us and spent money year after year on our sporting activities. I determined if I could help, I would be glad to, as a way of saying 'thank you.' Also, by lending the money, I would guarantee that I wouldn't spend it and I didn't need it for three years," she says. She ended up drawing up a contract for the loan, which specified that her dad would pay her back with interest. She got her money back right when she needed it. "Things worked out in the end, and I am happy that I was able to give my dad a gift to help him out when it was needed."

The lesson: Sometimes giving a loan works out well for both parties. Also, written agreements can help.

The bottom line: Borrowing or lending money to family members can cause problems that go well beyond money. As for Tarah, she says the best thing she can do for her family is to avoid repeating her parents' financial mistakes. That way, she says, she can avoid becoming a similar burden to her own children one day.

Twitter: @alphaconsumer