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  • Family loans gone bad. There’s always credit counselling.

    by:
    Laurie Campbell

    credit counselling family loans in Toronto

    Lending money to relatives brings to mind what I often say about casino gambling: if you can afford to part ways with the money you spend without any financial pain, then by all means hit the card tables, the roulette wheel, or the slot machines. Otherwise, get your butt out of the joint immediately and don’t look back.

    Providing sizable loans to members of your family or extended family can be a high stakes gamble when the lending is not properly thought through. Money not only stands to be lost, but close relationships and family ties can end in tatters. For proof, just watch any of the popular courtroom shows on TV these days. Parents, grandparents, brothers and sisters, aunts, uncles, cousins - they’re often found going at each other viciously over intra-family loans that have gone sideways.

    All hell can break loose as family members feud in the midst of tears, rage, threats, even ex-communication and court proceedings per Reality TV.

    The trouble mostly arises when emotions trump reason. Out of the goodness of the giver’s heart – and without due business diligence and process – sizeable intra-family loans are freely dispensed. Sister, say, assists younger brother with the down payment for his modest condo; or maybe uncle divvies up to help nephew get his first set of starter wheels. After that, all goes swimmingly until the loan payments go unmet or maybe verbal agreements are not honoured due to differing memories about what the agreements entailed in the first place. Spoken promises may be misconstrued or forgotten. Then again, the beloved debtor might just end up being a less than lovable deadbeat.

    At this point all hell can break loose as family members feud in the midst of tears, rage, threats, even ex-communication and court proceedings per Reality TV. Indeed, it’s quite astonishing at times to see how happy family relations can turn to loathing over a sour loan amounting to even only a few hundred dollars. Mostly though, higher price tags accompany the venom. Royal Bank of Canada (RBC) reports that as of couple of years ago, 78 per cent of family and friends in Canada lent or borrowed $500 or more amongst themselves. On average, intra-family loans amounted to a sizeable $6,000.

    Unsettled family loans can make for emotional wounds and for simmering resentment  – if not outright silence – between relatives that can last a lifetime.

    Money’s ability to disrupt even the closest of relationships only shows the immense power the green stuff wields over our lives. I think it affects us at a primordial level involving base reptilian instincts for survival. Unsettled family loans can make for emotional wounds and for simmering resentment  – if not outright silence – between relatives that can last a lifetime. Meanwhile, financial damages can be significant, sometimes calling for outside help through credit counselling wherein family-related psychological issues often are addressed on top of the material money matters themselves.

    I repeat what I’ve written before about personal loans to relatives and friends. Set emotions aside, and take a businesslike approach to the lending from square one. If the party receiving the assistance is offended by this approach, right away a red flag should be raised for it signals emotional immaturity about responsible management of personal finances – a key indicator for possible trouble ahead.

    Through a simple two-minute video, RBC advises that family lenders and borrowers know exactly what they’re getting themselves into.

    As a lender to someone in the family, you had best act in the fashion of the wise gambler I mentioned. If you are working from a position of financial strength, make the loan with the understanding that it could well end up being a gift. Be fully prepared to accept that outcome with no hard feelings. On the other hand, if the loan is a significant sum that needs to be paid back for the sake of your own financial security, then let reason prevail.

    To this end, RBC has posted online a simple, two-minute video that’s well worth a look for its wisdom and guidance. The bank advises that relatives know exactly what they’re getting themselves into with intra-family loans. What are the risks, repayment terms, and expectations of the deal? Above all, RBC urges parties to seek legal advice for developing a written agreement outlining particulars of the loan so that there are no misunderstandings. For more about the particulars, see this RBC video.

    Meanwhile, if you simply can’t afford to make the family loan, then pass on it with a reasoned but firm explanation as to why. Maybe try to help your relative in ways that don’t affect your income, savings, and investments. This may not go over well with the loan seeker at the outset, but he or she is likely to get over the matter sooner rather than later as other financing options and opportunities are explored out of necessity. These might include financial coaching programs offered through my not-for-profit credit counselling agency Credit Canada. Such programs offer individuals an affordable way to expertly manage personal finances and make money work harder not just for today, but for a lifetime of happy family relations. 

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