Should I Lend Money to Relatives? from Planck's Constant

Los Angeles Pawn Shop
Photo by: javazetti

My father used to tell me this story: Jake came up to my father and asked, "Herschel, how much do I owe you?" My father answered, "Twenty zloties, Yacov, why?" To which Jake responded, "Lend me ten more and I'll owe you thirty."

The next week the scenario repeated itself, Jake: "Herschel, how much do I owe you?" My father would say thirty zloties and Jake would ask to borrow another ten.

Then one week Jake asked my father how much he owed him and my father replied, "Nothing, Yakov, you owe me nothing." And that stopped the borrowing.

The issue of lending money to relatives is very neuralgic to the average person. There is nothing more uncomfortable than having a cousin, niece, nephew or sibling ask you for a loan. While I find no problem with loans to businesses or strangers, lending money to relatives is a lose-lose proposition.

Here's why. First of all, it's unseemly to charge interest to a relative; second, relatives will feel insulted if you give them a coupon book with which to repay the loan; third, relatives will not take kindly to you handing the loan over to a collection agency or a guy named Tony in the event of a default. If they cannot repay and you ask them for some money, any money, back they will resent you for putting them in that position.

So here you are, not making any interest on your money, and worse, losing interest you could have made by keeping the cash in a CD or savings account. If your relative can't pay you back, what are you going to do, sue? Have Tony Bagodonuts break some legs?

No, if you want to keep your relations happy, then disabuse yourself of the notion that lending money to your sister Mary can end in anything but bitterness and regret, by both parties.

But you may ask, "If I have the money to spare and they really need it, shouldn't I lend it to them?" No, no, no, no. There is nothing worse than lending money to people in need. Banks don't do it, neither should you. You should only lend money to people who don't need it and are able to pay you back. But if that's true then they can get the money from a bank and they shouldn't be bothering you.

Banks make money on loans because they charge interest, spread the risk among many borrowers, and sell the debt if it turns sour. Unless you intend on charging interest, lending to a few hundred relatives, and foreclosing or selling the loans if they turn bad, then do not ever, ever lend money to relatives.

If Aunt Martha needs a kidney transplant or cousin Betty needs a breast implant (at least you may get some benefit if cousin Betty (pictured here) shows you 'the after photo'), then you can help them out by simply giving them money instead of making a loan.

What you give will depend on what you can afford to throw away. If you decide that $500.00 is the amount then say to Aunt Martha, or better yet to cousin Betty, "I'm sorry, I cannot lend you $5,000 - and I know you need to have big boobs badly but all I can afford to give you is $500.00; it's not a loan, please take this as a gift. I don't want you to repay it, if you try I will refuse. I hope this helps."

In this manner you do three things:

You help your relative out; not completely but at least some help.

By giving a 'gift' you preclude the possibility of your relative coming back and asking for another gift. Asking for another loan is easier than going up to someone and asking for another gift. That's not how gifts work. Try it yourself. It's not uncomfortable to ask for a number of loans but no one will come up to you and say, "Hey, Joe, give me another $500.00."

Since there is no loan, there will be no bitterness on either party since there will never be any request for repayment. Nothing destroys a relationship as a bad loan. When they are unable to repay they will avoid seeing you.

The only time to break this rule is if you actually want your relative never to come around ever again. In that case, lend him or her enough money to ensure that they will never be able to pay you back. Harangue them a few times when they are late in paying you back and you will never see them again.

Now it may happen that a relative will ask you for a thousand dollar loan for some project or deal and you have that amount of money and you don't mind lending it to them. Don't do it. Make it a gift. Just because you can afford to make the loan is no reason to do it. If you want to ruin your relationship then lend away. But lending money to them will only make your relatives despise you. First because you have the money and they don't and second, because you put them in a subordinate position. When someone receives a gift they do not feel as if they are less a person than you.

The beauty of a gift is that if things get worse for your relatives they will not hate you for their predicament. If they borrowed a few hundred dollars and they need ten bucks for food and can't pay you anything that week, they will curse you for putting them in the position of a borrower and they will never forget it. If you gave them a gift and they have little money for food they will not curse you because you are not even in their minds, in fact they forgot that you even gave them any money. Certainly, they will not have any reason to avoid you.

There is nothing more important than family. Keep it that way.