The Bank of Mom and Dad—Personal Loans and Family Lending

If you have children or relatives who struggle financially, they might ask you for a personal loan. Should you lend them the money? That is a tricky question—personal loans to family members can hurt your finances, even if you feel obligated. Let’s look into the pitfalls and precautions related to family lending, that way you can set yourself up for the best possible outcome.

Loans to Family and Friends

It’s hard to say no when someone you care about needs money. A common scenario is adult children who request money from their parents. One study found that 59% of retirees are helping their non-student adult children with expenses.

An adult child or relative may ask you for a loan for a few reasons. Sometimes, it’s easier than getting money from their bank. Or, they may have no credit and are unable to qualify for a loan from a lender.

Relatives might also want a loan from you because it won’t affect their credit rating. Additionally, they may feel you’ll be more forgiving than a bank when it comes to repayment.

Family loans can sometimes harm your family relationships or your security. However, there are several reasons why you might feel you need to lend to a relative, such as:

• Obligation: You may feel you owe them something because they are your child, parent, or a close relative.
• Guilt: You may feel guilty if you have more money or fewer problems than they do.
• Empathy: It’s hard to refuse someone who needs help.
• Generosity: Generous people often enjoy helping others when they can.

Relationships and Personal Loans

Loans from (and to) relatives are often the source of relationship breakdowns. While it’s sometimes said that “money and emotion don’t mix,” the emotional aspect of family loans can cause a host of issues. Relatives can get angry, especially when you ask for repayment, a written loan agreement, or dictate how they can use the money. Consider the potential strain on your relationship when you decide to lend money.

If you are the lender, you may also get emotionally involved. Relatives may refuse to repay you, spend the money on things you think are unnecessary, or continue to ask for more money.

Why Are You Lending the Money?

Fortunately, there are steps you can take to set clear boundaries and minimise the possibility of a relationship breakdown. Here are some considerations to ask yourself:

Can you afford it?

Your relatives may assume you have plenty of money. But if a loan puts your personal finances at risk (e.g. failing to pay expenses or jeopardising your goals), it may be best to say no.

Can you gift the money?

Money presented as a gift rather than a loan may be beneficial. When gifted, the borrower is under no pressure to repay. There will be no hard feelings if they don’t pay you back, and you’ll be pleasantly surprised if they do.

Can you set boundaries?

Clear boundaries are crucial when you lend money, as those limits help prevent misunderstandings and the possibility of being taken advantage of. Be very specific about the terms and conditions of the loan.

Let the borrower know how much you are willing to lend, how it will be repaid, and how often they can ask for more money. This clarity can help prevent future conflicts.

Can you get it in writing?

Your adult child or relative may find it offensive that you want a written agreement, but written details eliminate any future misunderstandings. Your agreement should include relevant data, such as:

• The date
• Your name and the borrower’s name(s)
• The amount
• The loan interest, if you are charging any
• The amount and date of loan payments
• The date the loan should be repaid

Are there tax issues?

There may be tax implications if you lend a large amount of money. Consult an accountant to help you avoid surprises from the Canada Revenue Agency.

How Personal Loans Can Harm Your Finances

Helping adult children or relatives is noble, but it can have negative consequences—it’s important to be aware of the potential risks involved.

Some possible pitfalls include delaying retirement. Or, you may have to return to work to cover your expenses. You might also overuse credit cards or payday loans because of the unexpected shortfall. By that point, family loans can leave you deeper in debt and negatively affect your credit rating.

Other ways to help

Personal loans are not the only way to help children or relatives who need money. Some alternatives to consider are:

1. Family money management: Let your loved ones know how the lent money will impact your personal finances. Together, you may find other financial solutions with combined resources.
2. Budgeting: Encourage family members to budget and engage with personal funding options.
3. Alternatives: Suggest other loan solutions. That can include requests from new financial institutions, debt refinancing, or asset sell-offs.
4. Collateral: Have the borrower secure the loan with an asset you can sell to recover your money if they don’t repay it.

Where to Find Help

Falling behind on your own expenses and payments because of a personal loan can be stressful and frustrating. Fortunately, help is available.

If you’re having problems repaying your debt because you’ve loaned money to an adult child or relative, we can help. Our team of Licensed Insolvency Trustees at Adamson and Associates are experts in debt solutions. Call us at 519-310-5646 or contact us online for a free consultation. We’ll work with you to eliminate your debt and put your financial problems behind you.