Lending Money

Dear Jeff,

My younger sister and her husband recently approached me and asked if I would be willing to lend them some money. On one hand, I really want to help them out. But on the other, I am concerned that this may cause tension and awkwardness between us. Do you have any advice that will allow me to help them out financially without ruining our relationship?

Derek J.,
Ottawa, Ontario

Hi Derek,

Thanks for the great – but sometimes awkward question.

I say awkward because asking friends or family for money can be a very uncomfortable situation for everyone involved. For your sister, it was probably difficult to share her financial woes and ask you for help. And you seem to be in limbo between helping her out and protecting your sibling relationship.

The good news is this doesn’t have to be uncomfortable for anyone.

For starters, it’s important that you as the lender are sensitive to your sister and brother-in-law’s feelings. Asking for money isn’t easy, and the last thing they want is to feel judged for their financial circumstances.

The reality is, borrowing money from family is typically the cheapest loan an individual can get – and in the long run it can save a lot of hassle and money. However, if you are seriously considering lending your sister the money you need to be prepared and set some ground rules – for both of you:

  1. Set Clear Terms & Conditions
    A loan is a loan, is a loan. No matter how you look at it, you are lending money to a family member and you need to be very clear about each party’s commitments, obligations and expectations. Is this a loan that requires a regular repayment plan? Are you charging interest? Or have you decided upon some other form or repayment? Regardless, it is essential that you write down all the terms and conditions in a promissory note that you both sign.
  2. Maintain Open and Clear Communication
    Not only do you need to discuss the terms and conditions of the loan with your sister; you also need to include any other relevant family members in the conversation. If you share financial responsibilities with your spouse or partner, it’s important to be upfront about the potential loan and have all family members sign off on the plan.
  3. Don’t Put Your Own Financial Future at Risk
    What I mean by this, is that if the loan does not fit into your budget or is not money you “can go without”, then perhaps you need to look at other options. Perhaps you can co-sign a loan or help your sister find another source of financing. Either way, the solution has to work for everyone involved.
  4. Anything Can Happen
    Do not lend more money that you can’t afford to lose. Because you are a family member and not a financial institution, there is a possibility that this loan would be the first to go unpaid if your sister faces any future financial difficulties. If you have any doubt of ever seeing the money again, consider giving it as a gift instead of a loan – or offer an amount you are comfortable parting with.
  5. Ask Why
    While this may be one of the touchier aspects of lending money to family, exploring what is the root cause of the financial shortfall may be the most beneficial in the long run. Perhaps in the terms and conditions you agree to spend time helping your sister develop a household budget, or suggest she seek advice from a financial advisor. Asking why can go a long way towards preventing this situation from happening again.

Jeffrey Schwartz
Executive Director

Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).

If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to [email protected]. You’ll get the expert advice you need and your question may be featured here on our website.