No one can put a price on family relationships. Especially during the holidays, we cherish the time we spend visiting with relatives, relaxing, sharing meals, watching the big game on television, and simply showing appreciation for one another.
Aside from camaraderie and mutual affection, one of the most fulfilling aspects of family relationships is a relative’s positive influence on their loved one. In fact, it is a hallmark of good families that its members uplift each other through their good example.
It goes without saying that families are there to help each other. But what happens when a family member asks for a loan? During the holidays in particular, sometimes family members find themselves struggling financially under the burden of holiday festivities and other financial hardships. Oftentimes, their financial woes are the result of poor decision-making.
While we would like to believe that the person asking for money has sincerely learned from his or her mistake and is working to correct those decisions, loaning them money may not always be the best way to help them.
Before going to the bank and handing over the cash, you may want to consider a few things. The first thing is that if you're interested in keeping that relationship, the worst thing you can do is to loan money to your family member. It may sound strange at first, but loaning money creates an adversarial relationship between creditors and debtors.
In the world of business, a worthy adversary is a good thing, and laws are structured to protect the parties’ rights in the event of conflict. But the last thing anyone wants is to bring the potential conflict into their closest family relationships. There are countless examples in history and literature of strong families that have been tragically destroyed over conflict between its members surrounding money and inheritance.
If you can spare the cash, it is far better to give it as a gift to a loved one, than to loan it.
In general, there ought to be no such thing as a loan to family. However, if you cannot afford to give that money in the long run, the next best thing is to say "I'm sorry I cannot help with money," but offer some other way to help if you can. Of course, you'll run the risk of the family member not liking you and accusing you of being selfish, especially if they're in a tight situation and need the money immediately.
Ultimately, it is their responsibility to take care of their financial situation, and you would not be doing yourself or them a favor by loaning a sum you can’t afford to lose with no recourse whatsoever other than their word.
You have to consider whether their disapproval trumps your obligation to make responsible financial decisions for yourself and your dependents. And, if someone can’t borrow money at arms length from a bank or other financial institution, why would you be willing to become their lender of last resort?
Let this honest analysis keep you steadfast in the face of their anger or disappointment at your refusal. Chances are they'll come around and apologize later, when their emotions subside. They will realize that although you have not given them money, you still care for them. And because they know that they will not be able to borrow from you, it might help them to make better decisions in the future. If it does not, then it doubly confirms your decision to refuse the loan.
If you must lend money though, you need something of value as collateral, or a good-faith demonstration of their intention to repay the loan. Collateral is simply something of value to the other person — a flat screen TV, computer, riding lawn mower, new basketball hoop etc. — some form of property that will cover the cost of the loan, and that you hold on to until the loan is repaid. Collateral is simply a physical form of motivation to make good on an agreement.
Once you have agreed to what will be held for collateral, you should write your agreement down on paper and specify how and when payments should be made, and any penalties resulting from missed payments. You and your family member should then have the agreement notarized.
A notarized letter or document is simply your agreement in words certified by a notary public. A notary public is a licensed public officer who serves as an impartial or third-party witness to the signing of documents and establishes the authenticity of the signatures.
That means the notary public verifies that you and your family member are who you say you are so that later on, if someone breaks the agreement, that person cannot say he did not actually sign the document and can be held accountable in a court of law. A notary's signature and seal is required to authenticate the signature on your letter or legal document.
To verify your identity, the notary will ask you to present a current identifying document with a photograph, physical description and a signature, such as a driver's license, military ID or passport. Do not sign the document in advance as signatures must be witnessed by the notary.
In the end, only you can make the decision of what is the right thing to do with your money.
Don't let someone else make that decision for you, whether it's the TV, the mall, an insurance agent, your friends or yes, even your family. If there's one thing life teaches us, is that we are all responsible for our own choices. In a perfect world, everyone would be good for their word and would pay on time. Until we get there, hopefully the principles contained herein can help you navigate the tricky shoals of family loans.
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