Ask the Expert
Q: My brother-in-law has asked for a loan. He lost his job and supports a wife (my sister) and two kids. What should I do? — Conflicted
A: Dear Conflicted,
Lending money to relatives and friends can be a minefield. Most folks will say it’s not a good idea. Even if it’s a small amount, it’s likely to create tension – spoken and unspoken. Relationship dynamics may change forever – and for the worse. Even if you can afford to make the loan – you may experience a crisis and need that money yourself. Then what?
Also, statistically, most ‘loans’ to family members and friends do not get paid back. Typically these are open-ended loans with no real payback schedule or interest.
If you are in a financial position to afford to make the loan, you may want to consider these suggestions:
Talk with your spouse and agree that you are both willing to do it.
Create a promissory note with a re-payment deadline and interest (which makes it formal). Then have it notarized.
Use something as collateral for the loan.
Brainstorm options for a promissory note. Example: if the loan is to a relative who is a beneficiary in your estate plan, write an amendment that deducts the loan from the inheritance if not paid back.
If the amount is high, offer to loan a small monthly amount rather than a lump sum — especially if it is to help with household expenses.
- Do not use retirement funds.
What if you die before the loan is paid back? Will your estate be paid?
In the final analysis, be prepared to think of a ‘loan’ as a ‘gift’ and assume it will not be paid back. Also chat with your accountant and attorney if you face this situation.