As someone who has been on both sides of a personal loan, I have seen both successful repayments and damaged relationships from unpaid debts.

Aside from simply lending them money, how else can we help our loved ones when they’re in a tough situation? Is it ever a good idea to lend them some money? If we choose to do so, how do we establish ground rules? Let’s explore some of our options.

How can you tell if a loved one is struggling financially? 

Identifying if someone close to you is struggling financially is not always an easy task. There can be a lot of shame attached to financial struggles, and therefore, we tend to keep them a secret. But, of course, that only makes it worse. As a result, the truth will often show up indirectly in the forms of self-isolation, moodiness, irritability, and frustration.

So what’s the best way to find out? Simply by asking and making it clear that you care about them. Show that you care by opening up the topic and constructively asking your loved one: “Hey, you seem to be a little off lately. Is there anything you want to talk about? Anything I can do to help?”

What are the best ways to support your friends and family?

If you’ve gotten to the stage where your loved one is ready to talk, the best thing you can do is to listen. Being behind on bills or deep in debt is an all-encompassing feeling which leads to a lot of stress, anxiety, shame, confusion, and overwhelm. Being able to speak openly about the situation will be a nice source of relief for your friend. 

Next up, we should aim to seek the source of their financial woes. There are likely feelings and behaviours that have led to this undesirable position that may be difficult (or impossible) for you to diagnose and diffuse – know your limitations. 

As with many of the challenges we encounter in our lives, opting for professional help will always yield the best and safest results. That said, if you’ve had a healthy conversation with your loved one and they’re asking for your help, you can certainly help them get off to a good start!

Step one is almost always going to be to escape the financial fog

Many of us who have failed to properly manage our money lack systems, tracking, and clarity. Until we know exactly how much money is coming in and where that money is going out every month, we will continue to struggle as we live above our means and fall deeper into the hole. When this is the case, it is very common to ignore the problem altogether. Unfortunately, this only makes things worse, and our understanding of our situation becomes increasingly murky. Helping your friend determine their current net worth and monthly cash flow position is a great place to start. 

Ask questions like: 

• Which habits are costing us more than we thought? 

• What are we going to have to go without to get ahead? 

This can be a scary process, but the act of going through it already shows that we’re starting to commit to the idea of changing our behaviour. So encourage your friends to continue on the path toward financial freedom. 

The best thing you can do in the early stages is to offer your emotional support. If they’ve come to you for help, they’re likely also looking for an external source of accountability. Don’t be afraid to check in on them and see how they’re progressing throughout their journey.

Should I lend a loved one money?

In her book, Financial Recovery, Karen McCall says, “chronic money problems are typically not isolated events but result from patterns of overspending, underearning, or chronic debting.”

It is imperative to know how they got themselves into this position and what actions they will take. It is both an integral part of their financial recovery and valuable information as you formulate your assessment of whether or not you should gift or loan this person your hard-earned money. 

Since the beginning of time, I can imagine how many unpaid or partially paid loans have poisoned relationships and business deals. Neither party desires this outcome, yet it is a very real possibility. Therefore, it is important to take care of the details before you lend money to a friend or family member.

Ground rules for personal loans 

Put the deal in writing

If this is a significant amount of money to either party, especially if it’s you loaning the moola, you should seriously consider drafting up a contract. Sure — depending on the nature of the agreement and the relationship between two people, this may seem like overkill. However, going through the process will create clarity and accountability. It is imperative that both parties fully understand the loan. 

Look at a typical lending contract for reference

As the loan amount’s significance increases, so should the resemblance to a traditional loan. There is a reason that banks have so much fine print in their agreements. Clarity is paramount. If both parties understand all of the terms and conditions, there will be less potential for ambiguity and excuses down the road. 

Make a plan (either together or separately)

Take into account the necessary steps that your loved ones will take to improve their financial situation. They may need to consolidate to stop the bleeding on high-interest debts. They could need to sell an asset to repay their debts. Perhaps they have an outstanding tax bill that is getting in the way of preferred lending rates. Whatever the challenges may be, draw out the to-do list for getting them back on their feet. Continue to encourage the process. 

Create milestones for the borrower

When a start-up business receives funding from venture capitalists, they go through a process in which more funds become available as they hit certain milestones. For example, a product may need to have (x) sales in its first year. Again, this is to ensure that future investments are contingent on performance. 

From the standpoint of a personal loan, a similar practice may be wise. This way, you’re awarding progress rather than handing over cash up-front which may enable the very behaviours that created the financial problem in the first place. Consider attaching instalments of your loan to stages of their financial recovery plan. 

Do you or don’t you?

As humans, it can feel really good to help those in need. After all — no one wants to see their friends and family in distress. 

At one point in your life, you have likely experienced the weight of financial difficulties and can relate to the crushing anxiety it can cause. But, although noble, lending money to anyone can be risky. For that reason, you need a clear understanding from both parties of the terms and conditions and a timeline for repayment. 

If you’re in a good financial position and are comfortable providing monetary support to a friend in need, it may be best to let the money go with zero expectation you’ll receive what you gave back.

Either way, the key is, to be honest about the reason for the loan. Remember — you do not need to enter into a financial agreement if you feel pressured. 

Hopefully, the guidelines above will help you objectively assess whether this is a good loan for you to make. Likely, the best thing you can do is provide emotional support, friendly advice, and a professional referral.