My friend asked for a loan... is it a good idea?

We polled our Sense and Centsibility readers and asked if they’ve ever given their adult children money. Out of the 1,507 responses, a whopping 1,400 people said ‘yes’. This isn’t surprising because, in general, parents want to help their children in any way they can. Also, ‘giving money’ could be interpreted in different ways. Some may give to their children just because they can, for a gift, or it could be something more substantial like money to pay for bills on a regular basis or even providing a small loan.

Since I don’t have children, I’m going to put a different spin on the subject and talk about giving any family member or friend money. Because, let’s face it, adult children likely aren’t the only ones asking for help. It may be your adult sibling, cousin, best friend, etc. There is nothing wrong with helping out someone financially. However, you need to consider the risks involved before making the decision to lend a financial hand.

Here are 3 questions to ask yourself before giving/loaning anyone cash:

1.) Am I putting myself and my immediate family at risk?

If the answer is yes, then you really shouldn’t give money to anyone else. Instead, focus on priorities: keeping a roof over your/your family’s head, food on the table, transportation for school/work, utilities, and other payment obligations such as student loans or credit cards.

2.) Is this a one-time thing?

Determine this right away by talking to the person. Ask them, “If I give this to you, will it help you stabilize your situation?” If it’s going to be an on-going gift or loan, you’ll need to decide if that’s truly affordable. And not to mention if it’s a recurring donation, is it really helpful in the long run to keep giving to your friend/family member?

3.) Even if you can afford to give money, should I?

Ask yourself first if you want the person to pay you back and what happens if s/he doesn’t. One consequence of giving money to a friend or family member may be a strained relationship. Will your brother avoid you because he owes you money? And are you charging interest or just giving money and not expecting anything in return? Be really clear about the details of the gift or loan to hopefully avoid any awkwardness at Thanksgiving dinner.

Alternatives to Giving Money

If your friend or family member is struggling financially, here are some suggestions to help in ways other than giving them money.

• Refer them to your local County Offices or call United Way 211 for resources in your area. You never know what someone might qualify for until it’s checked out. For instance, they might be able to access Food Support, food shelves, childcare assistance, medical, and more.
• Encourage them to come up with ways to make money. Can they babysit or do something for you (or someone else) that would normally be paid for anyway? That way, both of you benefit.
• Another idea is to suggest that they have a garage sale &/or sell their unwanted/unused goods online (make sure it’s a secure/legitimate site).
• Do they have unsecured credit card debt? Refer them to LSS Financial Counseling to set up a budget and see if a Debt Management Plan (DMP) is right for them. DMPs help people pay off credit card debt in 5 years or less, likely reduce interest rates, and sometimes even monthly payment(s).

Giving can feel really good – that’s part of the reason we do it. In the end, it’s your decision how to spend your hard-earned money. It might be difficult to say ‘no’, but in the end you have to do what’s best for YOU and your partner, spouse, and/or kids.

Author Elaina Johannessen is the Director of Client Services at LSS Financial Counseling.