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Maybe she will, with the do's and don'ts of lending money to family, we are joined by Mility Hopson, GMA financial contributor and president of Aerial Capital Management. Welcome.
Welcome, thank you.
So it, it, can we narrow it down.Is there a yes-no answer to the question: Should you lend family money?
I wouldn't call it a yes-no answer; I would start with a very basic idea. Before you think about this familial obligation issue, let's start with can you afford it? And if you can't afford it that answers the question right away. Also can you afford it if they don't pay you back? A bank thinks about the same thing. They assess the risk of the loan that they are going to make. And they don't make loans that are going to make them insolvent. You shouldn't either, but if you go down this path, the one thing that I suggest you that helps mute some of the resentment or problems that can occur. Document it. Documentation helps a lot.
So those are the guidelines basically, you're saying: write it down on paper, sign it, date it, interest rates, someone said, the interest rates are low, so this is a good deal. We do look at family as a good deal, even for paying an interest that's usually lower than the market rate, right /?
Well, I would start with, you know, you want your names, you want the date, you want the amount, you want the purpose and yes you have a right to know. A bank would ask you what the loan is for. You may not wanna lend a family member money for a vacation versus a medical bill.
And you should tell them that. Hey, I don't want to pay for your trip to Disney World.(Perfect dictation )
Absolutely did in / terms, the terms may or may not include interest. They may include a payment plan; they may include it all back at a, over a lump-sum period. And then last, last but not least, sign it, copy it, make sure you both have a copy and when you get into issues, you pull out that piece of paper.
And you should have the hurt, supposed to be able to say to the person: I don't think I wanna loan your money for this purpose.
Absolutely, it's worse if you feel tremendous guilt and do something that you don't wanna do. You do it and it doesn't go well. That's a really bad situation. So on the front-end, maybe you can go to someone else, maybe I can cosign for a loan for you at the bank, really to create that kind of distance...that might be meeting them halfway.
This, this is so loaded, because it is not just the stranger, right? This is all the family history, all the arguments, all the little things you did your bother or sister, you did your parents, whatever you is loaded from the back-end with emotions.
There is no question about it, and there are certain people that think the family bank should always be open, that is not the case, there are also in most families there is a go-to person, that person gets called again and again and again, often, because there is a sense that they are good with money, they're button-down, they have the money and can loan it. And so those things just create just tremendous stress around these issues in families.
But it is hard to say no, you love this person, right? you wanna help them out. But this maybe not be the best thing for the person.
Well, it's hard to say no, but sometimes you have to say no. I had the situation just this week. I had a family member repeatedly needs money and at some point I had to say. And this, the moment of truth was this week. (Yah!) We are done, this is the last check that I would write, because I'm enabling you, to live a life style that you can not afford.
And how does he or she react?
Not well, I can tell you that.
And so that will affect your relationship. You gotta deal with this person at holidays and family reunion? you know?
But you know what, it's better than dealing with them when they are facing bankruptcy, facing serious, serious financial problems, because I didn't force them to look themselves in the mirror and try to take accountability for the life style that they were trying to maintain, that they quite frankly could not afford. It was just a fact, there were no two ways about it.
Let, now we've been talking about you as the bank in the family, what about if you need to borrow money, what, what do you do? How do you approach your family member?
Well, if you need to borrow money, I will go to them in the most professional way possible and I would be the one saying this is what I need the money for, I'd like to document this and write this down, this is when you can be expected to receive the payment. If I don't pay you back, I would be here before the money is due to renegotiate these terms, so they get a sense that you are very serious, very credible and you wanna make sure that this goes really, really well.
It's also good for your own self-esteem. You know, hey, we get terms here, we get interest payments, I am gonna pay you back.
There is no question about it. One interesting other idea, let's just say for some reason a family member doesn't pay you back, try having them work off the money. That's been something that I've tried lately and that goes extraordinarily well, they may do the baby-sitting that you need done or mowing the lawn or things like that.
I don't know any of my relatives would like to clean windows. Mellody Hobson, Thanks a lot for the good advice. Tit touch waters to navigate here.
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