Most personal finance experts argue that mixing family and business is as disastrous as mixing fertilizer and fire. It starts off as a good idea, only to spark into a raging catastrophe. Yet, neglecting a friend of family member going through a financially tough time can be just as agonizing.
There are downsides to lending money to friends and family
The biggest potential problem lending to those close to you is it can change the dynamics of the relationship. For this reason, many people adopt a general policy where they will not lend money to loved ones, regardless of the reason.
The money you lend may be gone forever…If a friend or family member approaches you for a substantial loan, it’s most likely because they can’t get it elsewhere. If banks, credit unions, and other lending institutions consider this person too high a risk, that assessment is probably right. For this reason, you need to consider the possibility that you may never get your money back.
Lending money you need puts pressure on all of you…Giving out a substantial part of your savings or earnings can put your own family finances in a tough spot. If you were to have a sudden change in fortune, such as a job loss, medical emergency or an expensive housing expense, would you have funds to cover this unexpected cost? (The same applies when you loan out money you’ll need for retirement.) Since you can’t expect to get paid back anytime soon, know that you can count on these funds to cover your financial obligations.
Playing a martyr or saviour doesn’t help anyone… Sometimes, people end up in a bad financial spot because of poor money management and bad financial decisions. In these types of situations, lending money will only enable poor financial habits, rather than help. Sometimes the best action is to let someone feel the sting of a situation they created. You need to determine if your actions will really help this person.
Are you prepared to lose this relationship? No one likes to feel indebted or scrutinized for every decision, but very often this can happen when loaning money to a friend or family member. For instance, how would you feel if you learned they’d just booked a luxury vacation? Or bought a new sports jacket or pair of shoes? Quite often, these situations can lead to judgement, bad feelings, harsh words, and the potential for a fractured or terminated relationship. Quietly nurturing resentments is no better.
Bottom line…If you’re not comfortable with the request, decline in such a way to protect feelings as much as possible. After all, this person sacrificed their dignity and pride before approaching you.
How to say no gracefully It’s not easy to say no to family and friends, especially when you have the financial means to do so.
A simple “no” with valid reasons…Possibly the easiest way to gracefully say ‘no’ is a simple: “No. I’m sorry. I cannot.” If you feel the need to explain, then remind them that the decision is not personal but rather a blanket rule: You do not to lend money to friends or family. Quite often, this direct, simple approach soothes bruised egos.
Propose other ways to help them… Consider a “no, but…” You may be able to help in other ways, such as an offer to review their budget and expenses; or babysit (for free) their children if it allows them to earn a bit extra. Another option is to offer to introduce them to friends who may need their services.
Substitute with a gift, instead… Consider giving a gift. A bag of groceries each week for a month or two, or ‘new-to-them’ work clothes can go a long way.