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Do you have clients who have gotten burned by lending money to a family member? It’s a common financial problem that I see with my clients (and my friends) all the time. Whether they decide to actually loan the money pr not, simply being asked for a loan by a family member can be confusing for your client and can lead to family discord and damaged relationships.

Though there are no real black and white answers when it comes to loaning money to family members, there are some guidelines you can share with your clients that will help them make the best decision for their families. Just remember, you can only give the advice, you cannot make them follow it. Establishing healthy boundaries with your clients means detaching from the decisions they make and letting them take responsibility for their own actions.

Make Sure They Discuss with Their Spouse

If you have a client who is considering loaning money to a family member and has not discussed it with their spouse, they are risking a major rift in their marriage. Part of being a counselor to your clients is helping them learn how to communicate about money better with their significant other. Many people will avoid talking about a possible family loan because they know it will lead to a fight or that their spouse will disapprove. However, in my experience, the answer is pretty cut and dried. If your client is thinking about loaning money to someone in the family, he or she must discuss it with their significant other first.

Encourage Them to Think of the Money as a Gift

One of the best pieces of advice I give my clients in this situation is that if they do loan the money, they need to change their frame of mind and start thinking of it as a gift rather than a loan. Most of the family loans I’ve seen have resulted in the person loaning the money never getting it back. If your client thinks of the money as a gift instead of a loan, they can release judgment and expectation and prevent a lot of resentment and ultimate fighting.

Tell Them to Ask Themselves the Following Questions

If your client is able to think of the money as a gift and not a loan, you can help them move on to the decisions phase of deciding whether or not this is really a good idea. Tell them to ask themselves the following important questions:

Can I afford to walk away from the money?  Too many people lend money they don’t have due to a feeling of over responsibility or an inability to say no. If your client cannot afford to lose the money without it having a major impact on their finances, they have to say no. They should never default on their obligations, go into debt, or compromise their security to loan money to a family member.

What will it do to the relationship? Family dynamics are all different. Some are able to freely loan money they’ll never get back and still welcome the family member over for Sunday dinner every week with no repercussions whatsoever. Others can’t help but harbor simmering resentment that inevitably causes family tension and fighting. Help your clients take a good look at the relationship they have with the family member in question. How will loaning money to them potentially affect this relationship? Will they feel awkward around this person or suddenly feel like they can control their spending? If they think that a loan will harm the relationship, they should say no.

Making it Formal

I’ve had some clients who have decided to loan money to a family member who has insisted on making it a formal contract. In these cases, it’s okay to put parameters on the loan such as expected payments, interest, and terms. There are some great apps out there that will help you keep track of the loan and set fair terms. I’ve seen this work for both parties and, though they may seem themselves as ‘business partners’ for a while, it doesn’t have any lasting negative consequences on their relationship. This is especially helpful for those who are normally very financially responsible but are just going through a rough patch.

There’s nothing more potentially harmful to a relationship than lending money to a loved one. If you have a client who has been asked by a family member for a loan and they’re struggling to make the right decision, help them consider the above before making a final choice. Have you had clients loan money to family? How did it turn out? Leave your story below!