How to loan money to a family member

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How to loan money to a family member
It's essential to consider your own financial situation before agreeing to loan money out. (Getty Images)

Loans between family members can be tricky. Even if the reason your relative is asking for a loan is legitimate, there is the question of how much they are asking for, how the loan will affect you financially and the ramifications for both of you if your relative is unable to pay you back. Here are some suggestions for loaning money to a family member.

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  1. 1

    Hear them out. Allow your family member to explain to you why they need to borrow money from you. Ask about the immediacy of the situation and get relevant details about what exactly the money you loan them will be paying for. While you don't need to make them feel like they are on trial for theft, it is important for you to feel that the money you are loaning is justified and will be put to good use.

  2. 2

    Consider the source. Examine your relationship to the family member asking you for the loan. If the two of you are not particularly close, ask yourself why they are coming to you now when they need money. If you have a close relationship with the relative, consider how many times in the past they have asked for money or to borrow things and how responsible and reliable they were for returning borrowed money or items in past transactions.

  3. 3

    Look at your finances. Before loaning any sum of money to a family member, think about how that loan will affect your own financial status. Even if the amount being borrowed is not particularly large ask yourself if lending the money will put a financial strain on you. If you decide that it will, explain this to your relative and explore other options, such as loaning them a portion of the money or asking another family member to pitch in on the amount of the loan so that you are not loaning the entire amount.

  4. 4

    Write it down. When you reach an agreement on a loan amount with your family member, write down all pertinent details of the loan agreement. Each of you should sign the agreement to signify that you both participated in writing the terms of the agreement and that you both agree to the terms and stipulations. Include the loan amount, the date it is being loaned, the purpose of the loan and the terms of repayment. This will help keep both you and the relative in question honest and relaxed about the outstanding loan until it is paid off.

  5. 5

    Be firm. Once the loan is due to be repaid, stand your ground about being paid back. If repayment becomes an issue, remind your family member about the terms of the agreement. Allowing yourself to be taken advantage of in a financial lending situation will indicate to other less honest family members that you are easy to take advantage of, so be resolved about getting back the money you loaned out.

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