How to manage family asking to borrow money

This was originally published on Monday,January 13, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I have a relative that is asking to borrow a large sum of money. I want to help, but do not know how or even if I should. I am worried that my decision can put a strain on our relationship.

Answer: This is a common situation on Guam because our culture is very family-oriented. We help out family and friends when the need arises, even when it comes to something as emotionally charged and personal as money. Lending money often starts as a sweet gesture in helping which can turn very sour very quickly. I have seen money tear families apart and close friendships forever shattered. If you do decide that you want to help, here are a few tips you may want to consider:

• Think about it. Give it some time and think if this is something you really want to do? Think about how well they handle their money. Are they constantly in debt or is this a one-time emergency situation? What do they need the money for? Are there other ways that they can get money? Can you help in other ways? Can you be emotionally supportive instead?

• Do not overextend yourself. How much are you able to help and not put yourself in a financial bind? Maybe you can lend a portion of the money. Do not dip into your retirement or children’s college funds. Do not lend more than you can without putting yourself into a financial bind as well.

• It’s a gamble. Nothing is for sure. No matter how trustworthy your friend or relative is, even if they have every intention of repaying the loan, something can, and often does, go wrong. If something were to arise and you do not get repaid, are you comfortable with the idea that you may never get that money back? If things do go wrong, do not lend additional funds until the previous loan is paid off.

• Talk to all who will be affected. Talk to your spouse and see if she/he will agree with helping. If it is something that you cannot agree on, it could cause stress in your marriage. Talk to the borrower’s spouse as well. They, too, should understand the terms of the loan. Also think about other family members who have asked and you have turned down. How do you plan on explaining why you have helped one relative or friend and not the other? Are you setting up yourself to be the family loan institution? Be sure that you talk with the borrower and explain how important it is that the help is personal and you would like to keep it just between you and them.

• Set up very clear repayment terms. Be as specific as possible and hold your relative to the terms.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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