Personal Reflection: Limits on Family Lending
You should probably never go into business with a relative. Or, lend them money. It may sound like cruel advice, but the consequences of doing such can be crueler. Over 38% of Americans have borrowed money from a relative within the last year. Family members lend an average amount of about $3,200 to their relatives.
Americans on a whole borrow anywhere from $184 billion to about $288 billion from family and friends. Every year. This is bad for a number of reasons. For one thing, credit scores can be damaged. Family members who cosign for loans can be legally sued to satisfy unpaid loans, for example.
Sometimes the recipient of the loan may interpret the loan as a gift. Also, irresponsible or immature family members who receive loans may never learn the self-affirming and responsibility-building need to financially stand on their own. Unpaid loans can tear families apart.
Power Imbalances in Familial Relationships
I speak from personal experience when I say that this isn’t a good idea. Several years ago, I asked relative for $1,000. They refused. I wasn’t angry at the time. I had no job, no savings, and no way of paying them back. I was disappointed then. But I understand why they refused me today. I was old enough to figure my problems.
Set Limits on Loans to Relatives
It’s OK to say no, especially if you suspect the loan won’t be repaid. If you do loan a relative money, they should be gainfully employed as a precondition. Know the reason for the loan. Charge them interest. Most banks charge anywhere between 5% to 36% interest for loans, so 10% might be a good baseline.
It is far too easy to ask a relative, someone who responsibly saved money, for help. If asked, you really shouldn’t lend money to relatives. You leave yourself open to financial penalty if the loan isn’t paid back. Worse, your relative may begin to depend on you for money in the future instead of becoming financially independent. Not being on speaking terms for refusing to loan money might be the least of your problems in such situations.