Expert Advice: Should You Ask Family Members To Sign a Contract Before Lending Money?
It’s said you should avoid three things in conversations with friends and family — politics, religion and money. That last one is important as financial matters have been known to ruin relationships, whether couples can’t align on spending habits or family members bicker over assets in wills.
And when it comes to the big ask of lending money to family members, experts and common folk alike have different opinions on the best practices. After all, a parent lending money to a child is likely more lenient in repayment terms than a bank. Could a contract help?
In a recent Newsweek article, the writer profiled a couple where the husband asked his wife to borrow $14,000 for an unspecified reason — she said she would but only if he would sign a contract that he’d return it in full.
Though users in the Reddit community where the wife shared her story strongly supported her decision, the husband was none too pleased. He was described as “shocked and offended” and admonished his spouse “for involving courts and lawyers between family.”
It actually doesn’t have to be that formal, says Kristen Ahlenius, an Accredited Financial Counselor® (AFC) and Director of Education at Your Money Line, a leading corporate financial wellness platform. Just having clear parameters that are written down and shared with both the borrower and lender is very effective, she shares.
“I think [a contract] is a great idea as long as it makes sense. If it’s a smaller sum of money, you might have to weigh whether or not having that additional security is worth it,” says Ahlenius. “But some kind of agreement is great for you and great for the person who’s borrowing from you because in a loving and caring way it kind of forces their hand when it comes to repayment.”
As a culture, we generally have a harder time setting boundaries with family so having this type of agreement is helpful in verbalizing what is expected, she adds. Though Ahlenius hasn’t personally had a client who had a family member sign a contract for loaned funds, she says she has had clients who have done so by establishing set standards.
“I think that part is just as important as the contract piece — if you’re loaning money to someone, it’s probably safe to assume that you care for them and want to continue to have a relationship with them and vice versa. So I think those clear parameters can be just as helpful as an actual contract,” she says.
Ahlenius adds the reality of a contract between two individuals is, just because you have it in writing doesn’t mean you’ll get anything if they don’t pay. “You’d still have to pursue legal action, so that’s the other side of it too. In the case specifically from Newsweek, is the wife really going to sue her husband if he doesn’t pay?”
Ahlenius has a few pointers in putting together an informal agreement. First and foremost, be clear on expectations. The agreement should note how much money is being borrowed in total, if it’s a lump sum or provided over time, and how and when it’s being repaid. Is it cash, electronic payment like Venmo or Paypal or some other means?
In addition, the agreement should note when payments will start and end, the day of the month they will be paid and how much the payment will be for. It could look similar to a summary sheet for a loan you might take out with a bank, like a mortgage, Ahlenius adds.
One great way to keep track between both parties, she says, is a Google sheet or similar platform where both the borrower and lender can see it all laid out as well as get updates in real-time by tracking payments that have been made and how much is left.
For the borrower, Ahlenius cautions to be honest and upfront in what is possible for repayment. “So often I think when we’re in a position where we don’t want to put a burden on a relationship you might feel that you want to pay this person back right away. But you should not do that at the expense of other obligations or your emotional well-being,” she says. “It’s best to make sure you take a really good look at what you can truly afford to repay and be honest about that both with yourself and the person who lends you the money.”
She also has words of advice for the person lending the money. “If you’re the lender of these funds, something to be mindful of is, if someone owes you money, that doesn’t give you the right to be upset about how they spend the money they do have. If you have an agreement with someone and they’re paying you $50-100 a month and you see this person out to dinner or getting nails done or buying a new pair of shoes, you shouldn’t have an opinion about how they spend the rest of their money. That really can cause money conflicts in interpersonal relationships a lot of times.”
In fact, according to the Newsweek article, citing a recent SunTrust Bank survey, it was found that 35% of respondents “blamed finances for the stress they experience in their relationship.”
As well, Ahlenius says, keeping in mind how lending the money might truly help or enable someone is another important factor when weighing the decision to offer a loan to a family member.
“Generally speaking, if a family member is asking you for a loan, you’re probably going to be close enough to have some insight into how they live their financial life and to know if lending this person money benefits them or hinders them from a behavioral perspective,” she says, adding, “There might be some instances where you know if you loan this money it might be financially enabling. It might be hard to say no but it might be best for them and your relationship to do so.”
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