Q: Do you think it’s wise to have loans among family members — for example, brother to brother, adult to child, parent to child, etc.?
A: Financial consultant Ron Blue highlights one all-important point to bear in mind in any situation like the one you’re envisioning: whenever money is loaned, the relationship between the parties involved changes. It’s no longer simply brother-sister, father-son, or friend-friend — it’s borrower-lender. When you loan money to a family member, you’ve introduced another level of complexity into the relationship.
This would also apply in the case of co-signing on a loan for a family member — in other words, putting yourself in the position of becoming a surety for that person’s debt. This is in effect the same thing as lending the money yourself.
If a member of your family is truly in need, you may want to seriously consider the option of simply giving him the money. Giving generously, with no strings attached, is a commendable and positive virtue.
However, if you have reasons for believing that this would be impractical or unwise, then Ron Blue recommends that you take steps to establish a formal borrower-lender relationship with repayment terms and interest rates clearly defined. Both parties should understand and agree to these terms up front. Don’t leave anything to uncertainty or chance (as in, “Oh, just pay me back when you can”). Those terms should be documented — in writing — so the expectations for repayment are plain to all concerned.
Again: however you approach the situation, lending to or borrowing from family members is a potentially dangerous thing to do precisely because of the way it changes relationships; it will almost certainly introduce tension at some point or other. We’re not saying that it’s wrong to get into an arrangement like this, but it’s something that needs to be approached with caution and discernment.
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