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Here’s What to Do When Loved Ones Ask for Money

You want to support them, but you’re not an ATM. These simple, smart steps can preserve the relationship and your cash flow.

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When a 43-year-old friend, whom I’ll call Loretta, was asked to help out financially with a family situation, logic and common sense told her to say no. In fact, she had a no-lending policy in place after observing that loans between family members usually went unpaid.

But this wasn’t just a loan to help someone make it to their next paycheck. Loretta’s brother was in trouble with the law and facing possible prison time. She was terrified for him. Of her immediate family members, she was the most financially stable. Who else was going to help?

So emotion took over. Against her intuition, Loretta, who works as an insurance agent, agreed to help. Her brother had no income and was going to court twice a month, quickly racking up legal bills. Loretta stepped in and paid the legal fees, her brother’s rent, car insurance and other bills. This went on for two years, forcing Loretta to turn to credit cards.

Then the support shifted. Loretta’s brother was prosecuted and went to prison. Her family quickly learned how expensive it is to have a loved one incarcerated. Weekly 15-minute phone calls cost $60. If they wanted her brother to be comfortable, it meant putting $75 a week into his commissary account, $150 a week during the holidays. Loretta didn’t want to see her brother suffer, so she continued to shell out money — money she didn’t have.

Loretta supported her brother and his son, her nephew, through his one-year prison sentence. But the support didn't stop there. When her brother was released, he had no place to go. Since she had space, she let him live with her, once again going against her better judgment. He had no income, so Loretta was on the hook for groceries, utility bills and anything else her brother needed.

Loretta subsidized her brother for four years and racked up $25,000 in debt. Her brother has no plans to repay her. She is on a three-year plan to pay off the debt, which includes working a part-time job.

While Loretta’s experience is unique, lending and borrowing between family members is common. The chances are high that you have or will be asked by a friend or relative for a loan. According to a recent CNBC Invest in You and Acorns Savings survey, 51 percent of the Black participants said they’d rather borrow from family than max out a credit card.

But should you do it? If cousin Brenda comes around asking for money (or asks for money again), should you just plunk it down? We can learn a lot from what Loretta went through. Consider these tips before you choose to lend money to a friend or relative:

Ask yourself these questions.
Emotion and your sense of generosity may overtake your rationale and logic as they did in Loretta’s case. Before deciding to lend money, pause to ask:
Do I have it? If you have to dip into an emergency fund, incur debt or juggle your obligations to accommodate a loan, you do not have the money.
Do I need it back? If your sister promises to pay you back next Thursday, and you know you’ll start sweating come Friday morning, you are not in a position to lend money.
Am I enabling a pattern or bad habit? You may be supporting someone’s irresponsibility or unwillingness to help themselves.
Expect the relationship to change.
Money changes relationships. Once you lend money to someone, you become their creditor. How will you feel if your cousin takes a trip to the Bahamas when she still owes you money? What will happen if she never repays you?

Loretta is on speaking terms with her brother, but she says the relationship suffered. “I realized I had to choose to save the relationship or get bitter over money.” She chose the former but admits it’s a process she continues to work at.

Consider giving the money.
Like Loretta, I too have a no-lending policy. If I have the money, I give it. If I don’t, I say no. Eliminate the potential messiness of lending by gifting the money if, and only if, you have it.

Establish guidelines.
If you choose to lend, discuss with the borrower the due date, a payment schedule and what will happen if the money isn’t repaid on time (for example, a late fee or interest). Make the terms clear and put it in writing.

Don’t expect the money back.
The above guidelines are more for the borrower’s benefit because the chances are high that you will not be repaid. I’ve borrowed money in the past and never repaid it, and I’ve lent money but was never repaid. Don’t lend more than you can afford to lose and assume it won’t be repaid.

Develop a personal lending policy.
Decide ahead of time how you will handle requests to borrow money. For example, choose to lend up to a specific amount or decide that you will only lend to a person once. Or establish a lending fund or budget, and when it’s depleted, it’s depleted. By establishing your own lending rules, you’ll be able to field loan requests objectively.

Know it’s okay to say no.
When asked what she would do differently, Loretta said she would give what she could and say no to overextending herself. If you cannot afford to lend money, don’t have it to give or don’t want to lend it, say no. Encourage your loved one to seek other resources. For instance, AARP’s Money Map is a free tool anyone can use to find solutions and resources for managing expenses and bills.

Loretta’s takeaways from her experience are ones we can all learn from. “One thing I learned from all of this is people will find a way to do what they need to do; it doesn’t have to come from you,” she says. “You have to listen to that inner voice and what your intuition is saying. When you violate yourself, you’re going to pay the price.”