Should you lend money to family & friends?

During these tough economic times, many people are turning to friends and family for loans rather than the big banks to avoid spiraling into more debt and defaulting on regular payments.

It’s always so hard to refuse a family member’s request for a friendly loan, but be sure to go into such arrangements with your eyes open and definitely your wallet closed.

Lending money to friends and family ranks among the most pernicious of relationship stressors.

The next time you get cornered by a needy friend or family member needing to borrow money—or the next time your heart compels you to lend out of generosity—here are some ideas to ponder.

Should you Do?

Only lend what you prepared to lose if they don't pay you back. Protect your own financial situation by refusing to lend more than you can comfortably afford to lose.

Make sure that you are not putting your own financial well-being on the line just because you feel sorry for them. Take care of yourself before you lend money.

If you have reservations about the person’s ability to stick to an agreement and repay the loan, you should say no. You're under no obligation to give anyone — besides the government and your own creditors, of course — a cent.

If you need to redraw on the home loan to provide a loan, then you really can’t afford to help out. Only lend what you can afford without compromising your own financial situation.

Ask yourself whether the loan will put the borrower into a lifestyle that they cannot afford. For example, if you help a child with a down payment on a house, will they be able to pay the property taxes, mortgage and other expenses that result? Or are you setting yourself up for many future loans/gifts and them for an unsustainable lifestyle?

Last, but most importantly, don't allow financial agreements/disagreements to get in the way of your otherwise harmonious relationships.