Q&A: Should we lend my brother money?
A new reader question on The Joint Account.
QUESTION:
My brother is asking if we can lend him some money. Like, he’s my brother and I want to help him out, but I’m unsure how to even approach this with my wife, let alone, how to go about giving him the money. What do you think?
ANSWER:
Families deal with this all the time. More than half of Americans have borrowed money from or loaned money to a family member, according to this LendingTree survey. But lending loved ones money isn’t as easy as cutting a check and hoping for the best, especially when you’re married or cohabitating with an S/O.
First, you and your partner need to discuss your beliefs on lending family members money in general, because people can have widely divergent viewpoints on this, depending on how you were raised. Do you both believe you have a moral obligation to support family—no questions asked—or only under certain circumstances? Maybe you’ve never thought about it before. It’s important to explore and then determine your values clearly, because this first ask could be the first of many, not just from your brother but from other family members down the line. Know where you both stand. If you’re on opposite ends of the spectrum, this next point matters even more.
Evaluate the circumstances surrounding the request. Is your brother a reliable guy just going through a tough time, like a layoff or a health issue? Or does he have a pretty bad track record with his finances, and your loan would just enable more bad behavior? The details help you assess the risk of whether you’ll be repaid and how you’ll feel if you’re not. Making personal loans inherently comes with risk. But you might feel more comfortable with that risk if it’s helping your brother through a temporary time of need than if you’re rolling the dice on, say, a business opportunity he’s presented you with. Opportunities, unlike needs, should be even further scrutinized.
The most essential thing to understand is whether you can actually afford to do it. Sit down with your wife and review your financial situation together: what are your current obligations, and how would the loan affect your goals? Look at your emergency savings, retirement accounts, and any future expenses on the horizon. Remember, the money you're lending could be tied up for a while or never come back at all, so ensure you're prepared for that possibility. Under almost any circumstances, your own security must come first.
Let’s say you both agree that you want to lend him the money, and you can afford it. Now, you’ve got to set clear terms of the loan. Draft a basic written agreement that outlines key details like the loan amount, repayment plan, interest (if any), and the due date. Keep in mind tax considerations, too. For loans less than $10,000, you can lend money to a family member without charging interest. For loans greater than $10,000, however, the IRS requires that you charge a minimum interest rate called the applicable federal rate (AFR). Generally, any interest you collect on a loan is taxable as income. Depending on the size and terms of the loan, you may want to consider obtaining legal and tax guidance from an attorney or CPA. Working this all out in advance will prevent any confusion and misunderstanding down the road. You also need to establish open and ongoing communication that your wife is made to feel a part of. Back-channeling or sidestepping won’t help establish trust between them, and that trust is important, so this loan doesn’t start to fracture family bonds.
Here's where things get hairy.
What happens if he can’t pay you back? Are you really going to sue your brother? This is why that upfront communication between you and your wife about the loan is so incredibly important, because if you’ve already determined that you can stomach the blow without much financial or emotional damage, then it won’t be devastating if he doesn’t follow through. But if his failure to pay poses any risk of blowing up your relationship with him or your marriage, I wouldn’t do it. Be honest and just tell him the truth. If you still wish to help but cannot offer all of what he’s requesting, you can consider giving a smaller one-time gift, or breaking the sum up into more manageable monthly payments (and address that in the terms of the loan). Just whatever you decide, present a united front with your wife.
It all comes down to clear communication. Aligning with your spouse on expectations, protecting your own financial well-being, and setting boundaries can prevent unnecessary stress (and awkward holiday dinners). And hey, if lending money feels too risky, remember that “no” is a complete sentence.
Do you have a love and/or money question for our Q&As? Let us know!
Over the weekend, our entire family went down to South Jersey to participate in the Race For Hope Greater Philadelphia. Heather’s close childhood friend is a brain cancer survivor, and we wouldn’t miss the opportunity to support her and all the other heroes running and walking with us that day. While her mom ran ahead, Hazel and I walked the entire 5K without complaint! Seeing her interact and bond with so many of Heather’s long-time friends made every step that much more special.
TJA in the News!
For CNBC, I weighed in on why people rather talk about politics than money and why skipping money conversations today can harm you in the long run.
Andddd, building off my flop of a marshmallow money lesson, Heather spoke with the wonderful Lindsey Stanberry about all things kids and money for her newsletter, The Purse.
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The content shared in The Joint Account does not constitute financial, legal, or any other professional advice. Readers should consult with their respective professionals for specific advice tailored to their situation.