Mellody Hobson: Balancing Family and Money

July 18, 2006 — -- Whether you should lend money to a family member depends upon both your relationship with that family member and whether you can afford to do it. If you decide to move forward, be sure to set very clear guidelines right from the start and do not let the informality of your family relationship disguise the seriousness of the loan.

What if you need to borrow money? Is it best to go to family first? How should you approach it?
If you need to borrow money to get through a tough financial time or start a new business, you need to carefully consider the pros and cons of going to a family member. While there may be fewer roadblocks than going to a bank, money and family do not always mix well. However, if you have poor credit or think it might be difficult to secure a loan, you may want to look to a family member for help.

For starters, go to someone who is in a financial position to lend you the money, and avoid asking someone whose finances are strained, as it will put both you and the lender in an awkward position. When approaching the loan, you need to provide a clear explanation of why you need the money and how you plan to repay it. Be very businesslike about the whole transaction, as it will give your relative confidence that you are serious about repayment and are not just looking for easy money.

Once the loan is made, be sure to stand up to your commitments of how the money will be used and when it will be repaid. If you realize that you are not able to repay as quickly as the time frame you originally agreed upon, go to the family member before he or she has to come to you looking for the money. Agree upon a revised plan -- which may include repayment in services instead of cash -- that you can realistically meet.

How do you set the parameters?
Setting parameters is extraordinarily important, because you do not want money to come between you and your family member, which happens more often than we would like. Before agreeing to lend the money, make sure you clearly establish the purpose of the loan. If the reason for the money is not clearly stated and the loan ends up going toward an extravagant new wardrobe or beach vacation when the lender was thinking it was to help a relative through a financial hardship, anger and tension will likely develop. As such, make the loan as official as possible by agreeing upon guidelines and putting them in writing.