It’s always tricky when close friends and family members approach you for financial help. You don’t want to destroy the relationship but also want to be careful before giving away your hard-earned cash.
Having boundaries will help to prevent money from coming between you and your loved ones. Finance experts say a good rule of thumb is not to lend anyone money that you’re not willing to part with – perhaps forever.
“When relationships and finance are involved, there is a significant risk of losing one if not handled correctly,” says Gurcharan Singh Mehta, group manager at Continental Financial Services Group.
“This does not mean that we should not extend our support. Instead, we should look at extending long-term support by being practical and thoughtful at the same time.”
About 60 per cent of Americans have helped out a friend or family member by lending cash with the expectation of being paid back, 17 per cent have lent their credit card and 21 per cent have co-signed for a financial product such as a loan or rental property, according to financial services company Bankrate, which polled 2,490 adults in 2019.
But 35 per cent who undertook at least one of these activities suffered negative consequences, such as lost money, a damaged credit score or harmed relationship, the survey found.
Here’s how to handle money requests from your loved ones:
Take your time
It’s best not to rush into a decision. Instead, the decision of whether to lend money to your relatives should come down to your own financial situation, says Arun Leslie John, chief market analyst at Century Financial in Dubai.
“For example, if your personal financial situation is not great or if the contingency fund is barely enough to cover any unforeseen situation, then lending money can damage the relationship with that person. So it’s better to convince the borrower that your savings are not enough or that you have a lot of expenditure coming up,” he says.
You must consider your capacity to lend from two angles – current means and future needs, says Sophia Bhatti, a partner at Hoxton Capital Management.
Giving money to your relatives makes sense if you are in a situation that allows you to budget a set amount to send them each month, she adds.
If you don’t have the funds, it’s in your best interest to decline the request. Don’t go into debt to support your relatives, Ms Bhatti says.
“If you need the money for an upcoming expense, you may also need to say no. Giving a monetary gift to your relatives might prevent you from making a down payment on a house, for example,” she says.
“However, if you have money available in an emergency fund and can easily replenish it, you may want to consider lending some of that money to your relatives.”
After due consideration, you should let your relative know of your decision as soon as possible. Making them follow up several times will sour the relationship even if you lend them the money, says Damodhar Mata, a financial adviser in Dubai.
“The worst thing you can do is say yes and then go back on your word later. Do not promise until you are sure you are able to give the money on time.”
Be polite but firm
It is difficult to say no when under pressure, but you should not immediately agree to a loan request, experts say. If the situation, amount and time frame allow you to take the risk, then you can agree to it; otherwise, politely say no, says Mr Mehta from Continental Financial Services Group.
Do not borrow, dip into your emergency savings or use the funds set aside for future expenses such as rent or school fees to lend to your relatives, Mr Mata says.
“If you still want to help, find out if there are other ways. If possible, direct them to other potential sources, but never guarantee the repayment on their behalf.”
Find other ways to help
If possible, try to help your relative find a job. Or try to enrol the borrower in a skill development programme to enhance their career prospects, says Mr John from Century Financial.
“This will be a long-term solution for their financial woes,” he adds.
If your relative is willing to create a budget, for example, but hasn’t made one before, you could offer to help, Ms Bhatti suggests. Perhaps you could set up a spreadsheet if they don’t know how to do this.
“If this is the case, you have an opportunity to mentor them about good money strategies and habits,” she adds.
It’s very important to invest time and help your family member learn how to manage their finances smartly, says Mr Mehta. Many people are unaware of the personal financial planning tools that could be helpful for managing their funds, he says.
“Financial planning, which includes saving and investing money, is an integral part of overcoming unexpected expenses and situations leading one to have to borrow money.”
Understand why they are asking for money
If the request is for a medical emergency, groceries, school fees, utility bills, rent or a mortgage, you could help them if your budget allows, says Mr Mata.
“For a genuine need like a medical emergency, you should lend, but only an amount you could write off immediately,” Ms Bhatti says. “When you write off the amount mentally, even if the money never comes or comes after a while, your relationship with that friend or family member isn’t negatively impacted.”
If the reason is more trivial, or if the requests are recurrent and habitual, Mr Mata believes it would be better not to encourage them.
“You should never lend to accommodate someone’s lifestyle wants. There are enough options out there to fund such expenses, such as a credit card to personal and even lifestyle loans,” Ms Bhatti adds.
Make the repayment terms clear
If you decide to lend money to a relative, the terms should be clear, says Mr John. If the conditions are vague, there could be arguments in the future.
Mr Mata advises making sure you clearly communicate the terms and that they are agreed upon in writing.
Verbal financial agreements are one of the main causes of misunderstandings and disagreements between family and relatives, he says.
“How the money will be repaid, within what duration and how many instalments should be discussed in the beginning itself. It is generally better to have regular payments rather than wait for a lump sum amount at a future date,” Mr John says.
When you lend money to a person, it is better that it is not given for long, he adds.
“The reason is the opportunity cost of money. Opportunity cost is defined as the potential benefits that an individual misses when choosing one alternative over another,” Mr John says.
“If the person had put the funds into mutual funds or a fixed deposit, there could have been potentially better returns.”