Finance Globe

U.S. financial and economic topics from several finance writers.
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Should You Bail Out a Friend or Family Member?

If a friend or family members comes to you with a request for financial help, you may struggle with the decision. Depending on your personality and your beliefs about money, you may jump at the chance to help out someone. Or, you may turn them away, if you have a policy to never loan money. Whatever you decide, it could have a major impact on your relationship.

Who is it?

Suffice it to say, your relationship to and with the person asking you for help will play a major part in how you answer. A member of your immediate family, like a sibling or child, may get a “yes” sooner than a distant cousin twice removed who you’ve only met once at a family reunion when you were seven. Likewise, you may lend to a close friend quicker than an acquaintance with whom you hardly ever speak.

Can you afford it?

If you can’t afford to help that person out, then the answer should be an obvious no. If you don’t have the money, you just don’t have it. Should you borrow the money, e.g. take out something from retirement or take a second mortgage out on your home? It’s extremely risky. To take on this kind of risk, the person would need to be a close relative in a dire emergency, think life or death.

The logical answer is that you shouldn’t borrow to help out someone else’s emergency, but money decisions – especially when it comes to helping out someone you love – aren't always logical. Sometimes there’s some emotion involved and that's ok.

On the other hand, having the money readily available doesn’t mean you should loan it or give it away just because someone asked for it.

Why do they need it?

Helping your sister pay her electricity bill because the service is a day or two away from being disconnect is much different than helping her pay a cable bill. We can live without cable, but not without electricity.

You may not want to get very involved in someone else’s financial matters, but you have to know whether they're asking you for help because they’ve been irresponsible or was there an isolated situation that led to this financial need. If this person is comfortable enough with you to ask to borrow money, then you probably know them well enough to know whether they’re a responsible spender.

Find out why they’re asking for money, dig a little deeper to asses their true need, and use that information to make your decision.

Is this a one-time thing?

Helping out a friend once is one thing, but you shouldn’t be added to the list of their regular income sources. If you decide to help out, make it clear that you’re only doing this favor one time and they’ll have to figure out long-term solution if they have regular cash flow problems.

Is this a loan or a gift?

It’s said that you should never loan money you can’t afford to give away. Once you’ve decided that you’re going to help, you then have to decide whether this is a gift – e.g. you don’t expect to be repaid – or a loan for which you expect to be repaid.

What are the repayment terms?

If you ultimately decide that you’re going to loan money to help out your loved one (versus just giving it to them), come up with the repayment terms. Are they going to pay you back all at once or make periodic payments? What’s the payment amount? When you do expect to be repaid? What’s going to happen if they don’t repay you?

Loaning money to a loved one can put your relationship in an uncomfortable place. You go from being their parent or friend to being their lender and how chummy are you with your lenders? Be aware that their owing you money can put a strain your relationship and if they don’t pay you, things may get worse. Sometimes it’s easier to just gift the money than to deal with the fallout from an unpaid loan.
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Tuesday, 22 June 2021

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