My mother has been helping me all her life, as most mothers do. Not only did she raise me, but she also helped me pay for my education, and many times she outright gave me cash gifts.
Lending money to a family member is an opportunity to show my gratitude
A few weeks ago, when she asked me for a loan, first of all, I was surprised, then I was apprehensive, and then I was delighted to finally, for the first time in my life, to have an opportunity to pay back a portion of the generosity she has shown towards me over my whole life.
I take this opportunity to to talk about the things we should think about when we borrow or lend money to a family member.
Not all family members are the same
On the other hand, if my father would ask me for a loan (my father is no longer alive), most likely the answer would have been No.
I don’t have much respect for my father. He did pay the bills and brought money home, but he was never around to be emotionally present and he cheated on my mother with many different women. He bought me Christmas presents, but he never gave much of his love.
I am sure many of you have a family member from whom you feel detached, they are mostly an accident of biology but don’t provide the love and affection most family members give to each other.
The spending patterns of your family members
I have a family member who lives luxury and also lives from paycheck to paycheck. I would be VERY hesitant to lend money to this family member. On the other hand, I have other family members who I see as having healthy habits of consumption. I would be more inclined to lend to those other family members.
When someone asks you for help, you get to judge if they seem to have good or bad spending habits and whether is loan is triggered by responsible or irresponsible spending habits. I would have a hard time lending money to someone who lives more lavishly than me.
Be aware that you might never get paid back
When I lent money to my mother, I told myself: “Self, if she never pays us back, that’s okay.”
This is a reasonable expectation. Just like with any other borrower, you might never get your money back. But in the case of a family member, you will have to accept that you might never get paid back, and still you will have to share time with that person at family gatherings.
Set the terms of the loan in writing
The terms of the loan are simple, they state:
the amount
the repayment date
and the interest
This is a time to make sure you are both on the same page. Many times, the terms of a loan between family members are ambiguous. This is the time to iron out any misunderstanding.
If the loan is interest-free, that should be written down as well. I recommend making loans at least at the inflation rate, but a 0 interest rate loan is legit as well.
Consider gift taxes
If you have the feeling that the loan will not be paid back, then there might be some taxes implications.
In Canada, there is no “gift tax.” Any resident of Canada who receives a gift or inheritance of any amount, except from an employer, or as a tip or gratuity due to their employment, will not have to include this in their income.
However, in the United States it’s different. As of the 2018 tax year going forward, the Internal Revenue Service (IRS) has a $15,000 gift tax rule. A small loan will travel under the radar, but if you don’t charge interest on a loan of that amount or more, it may be considered a gift. The recipient will have to pay taxes.
Conclusion
There’s no guarantee a family loan won’t bring disappointment and conflict, but that won’t stop us from helping the people we love the most. If you agree to lend money to your family, having a plan is the best thing you can do.