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During times of hardship, people often turn for help to a family member. Often, people get into financial difficulties if they lose a job, overuse credit cards, or incur expensive medical bills.
Unfortunately, many well-meaning family members have found themselves sucked into the financial abyss by the problems of a loved one.
Let’s take a look at a few options you can consider to help your family members in financial trouble without hurting yourself in the process.
Key Takeaways
- When a loved one is struggling financially, take a pause before providing money and consider whether they have a plan for avoiding the same pitfalls in the future.
- Make sure you have a clear agreement about the form of help, such as a loan or gift, and any terms for repayment.
- If you want to give the person something outright, consider giving them cash, paying one of their bills directly, or providing them with non-cash assistance, like gift cards, or certain resources they need.
- Consider providing them with a job, if you can, or help them to create a bill-paying plan, or to access local resources like career counseling and training programs.
- If you want to help them with a loan, consider whether you want to make a personal loan or to co-sign a loan that they are seeking from a bank or other financial institution.
1. Give a Cash Gift
If your loved one is having a short-term cash flow problem, you may want to give an outright financial gift.
Decide how much you can afford to give without putting yourself in financial jeopardy, and then either give the maximum amount all at once (and let your loved one know that’s the case) or perhaps give smaller gifts on a periodic basis until the situation is resolved.
Make sure it’s clearly understood that the money is a gift and doesn’t need to be repaid so you don’t create an awkward situation for the gift recipient.
Annual Exclusion
If you’re considering giving them a substantial sum of money, you’ll need to keep an eye on the annual gift tax exclusion set each year by the Internal Revenue Service (IRS). In tax year 2024, the exclusion is $18,000 per person.
2. Make a Personal Loan
Your family member may approach you and ask for a short-term loan. Talk frankly, put the terms of the loan on paper, and have both parties sign. This will help ensure that each party is clear on the financial arrangement they’re entering into. Some loan details you’ll want to include are:
- The amount of the loan
- Whether the loan will be a lump-sum payment, or if it will be divided and paid out in installments upon meeting certain conditions (e.g., securing another job or paying down existing debt)
- The interest rate you will charge for making the loan and how it will be calculated (compound or simple interest)
- Payment due dates (including the date of full repayment or final installment due)
- A recourse if the borrower doesn’t make loan payments on time or in full (e.g., increasing interest charges, ceasing any further loan payments, or taking legal action)
If you are going to lend more than $10,000 and/or you’re going to charge an interest rate that is substantially different than the going rate for most borrowers, you may want to talk to a tax professional. There can be unique tax implications for low-interest loans among family members.
When helping out a loved one in financial distress, there is a risk of getting sucked into a loop of loans and payments. To avoid this, make sure the terms and structure of the loan or gift are clearly defined in advance.
3. Co-Sign a Loan
Your loved one may be interested in obtaining a loan or line of credit (LOC) to help with short-term financial needs, but what if their credit requires getting a co-signer? Would you be willing to co-sign a loan or LOC from a bank, credit union, or online lender?
Potential Pitfalls
Before saying “yes” and putting your good credit reputation in the hands of someone else, it’s important to realize there are legal and financial implications to co-signing on a loan. The most critical thing to understand is that you are legally obligating yourself to repay the loan if the other borrower fails to do so.
The lender can take legal action against you and require that you pay the full amount, even if you had an agreement between you and your family member that you would not have to make payments.
This delinquent loan will also now affect your personal credit. So if your sister/brother/uncle fails to make payments on the loan on time and in full, the lender can report the negative account activity to the credit bureaus to file on your credit report which, in turn, can lower your credit score.
Consider the Risks
Co-signing a loan is serious business. The fact that your family member needs a loan co-signer means the lender considers them too great of a risk for the bank to take alone. If the bank isn’t sure they’ll repay the loan, what guarantees do you have that they will?
It may also mean that you could have more difficulty getting a loan for yourself down the road since you are technically taking on this loan and its payment as well.
Before co-signing for a loan, make sure you:
- Ask for a copy of your family member’s credit report, credit score, and monthly budget so you’ll have an accurate picture of their finances and ability to repay the loan.
- Meet with the lender in person (if possible) and be sure that you understand all the terms of the loan.
- Get copies of all documents related to the loan, including the repayment schedule.
- Ask the lender to notify you in writing if your family member misses a payment or makes a late payment. Finding out about potential repayment problems sooner rather than later can help you take quick action and protect your own credit score.
4. Create a Bill-Paying Plan
Often, people in a financial crisis simply aren’t aware where their money is going. If you have experience using a budget to manage your own money, you may be able to help your family member to create and use a budget as well. To break the ice, offer to show them your budget and your bill-paying system and explain how it helps you make financial decisions.
As you work together to help them get a handle on their financial situation, you may find places where they can cut back on expenses or try to increase their income to better meet their financial obligations.
5. Provide Employment
If you’re not comfortable making a loan or giving a cash gift, consider hiring your family member to assist with needed tasks at an agreed-upon rate.
This side job may go a long way toward helping them earn the money they need to pay their bills and help you finish up any jobs that you’ve been putting off.
Treat the arrangement as you would with any other employee—spell out clearly the work that needs to be done, the deadlines, and the rate of pay. Be sure to include a provision about how you’ll deal with poor or incomplete work.
If you don’t have cash to give a loved one, recognize that your time, patience, and ability to help them brainstorm and problem-solve are also valuable assets that you can provide.
6. Give Non-Cash Assistance
If you’re uncomfortable or unwilling to give your family member cash, consider giving non-cash financial assistance, such as gift cards or gift certificates. You’ll have more control over what your money may be used for, and you can easily buy gift cards in varying amounts at most stores.
7. Prepay Bills
You may want to consider prepaying one or more regular bills that your loved one receives (rent/mortgage, utility bills, or insurance premiums) to help them during their current financial crunch. Offering to do something, such as making their car payment, may help them avoid a short-term crisis and give them the extra time they need to work out of their situation.
8. Help Find Local Resources
You may not be able to provide your family member with financial assistance or hands-on help. But you can still play a key role by helping them find local professionals who can steer them in the right direction, such as:
- Career counselor and employment agencies
- Welfare agencies and similar services
- Credit and debt counselors
- Lenders who can provide short-term solutions
How Much Money Can I Gift Before the Gift Tax Applies?
For tax year 2024, you can give up to $18,000 per person.
Can Budgeting Apps Help a Family Member?
Budgeting apps can help, as long as your family member understands the value of a budget and uses the app regularly. Two well-regarded budget apps you might consider are YNAB (You Need a Budget) and Simplifi by Quicken.
Is Lending Money to Family Members a Good Idea?
It may or may not be. Making a loan can show that you care about your loved ones. But getting your money back is another thing. And making, or co-signing for, a loan may result in negative effects such as ill will and damage to your financial standing if it remains unpaid.
The Bottom Line
Family members and money aren’t always a good mix. But, in tough economic times or when faced with unexpected emergencies, a loved one may truly need your financial assistance. Find out specifically what help they need to work their way out of their current situation.
Before you commit to helping financially, be sure to think through what you can and can’t afford to do. Remember, if your own resources are limited, there are other meaningful, effective, and creative ways to help your family members.