To loan or not to loan – that is the question. We have all been there before. A family member or close friend asks to borrow money. So should you lend it to them, or tell them to hit the road?
Most financial experts suggest never to loan money to family members or close friends. The most notable reason of course is that failure by one party to repay the loan can lead to severe resentment or insult to the other. Sure, you want to help out but when and if the loan is not repaid under the conditions you agreed upon there can be major emotional and financial consequences between parties. Consequences that could easily strain even the most concrete relationships. Dave Ramsey uses the example that even Thanksgiving dinner does not taste the same when one family member owes money to another. There is resentment there.
It is my opinion that one should not lend to family or friends. Instead, I think you should only give the money as a gift. That is right… give it to them. No loans, no interest rate, no monthly terms attached. Either you give it to the family member in need outright as a gift with no strings attached, or you do not give them money at all. If you cannot afford to give it, then you cannot afford to lend it.
My family is very close. Not just between my brothers and sisters, but cousins, aunts, uncles, etc. We are not the kind of family that is unwilling to help each other. But, when we help each other it is in the full spirit of giving. We do not give with the conditions of any type of repayment. When you lend money, you are assuming (reasonably) that you will once again see this money return to you. But the truth is, depending upon certain circumstances, you may never see that money again. The relationship problems that come with lending money are never about loans that are repaid on time and in full. They are caused by the ones in which the lender never receives the full amount back.
So this is my rule for not only giving, but receiving help from family as well: If a person cannot afford to GIVE you the money you request (read: can afford to never see this money again), then the person cannot afford to LEND you the money.
One Last Note: For 2010, the annual gift tax exclusion limit is $13,000 per person. This means that there are no gift tax consequences for amounts under this limit.