What do you do when a family member becomes unemployed or suffers an unexpected injury and can't work or has insufficient insurance to cover mounting medical bills? How do you respond when you learn a loved one can't pay their bills? Let's take a look at a few options you can consider to help your family members in trouble – without hurting yourself financially.
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 you can afford all at once (and let your loved one know that's the case) or perhaps give smaller gifts on a periodic or regular basis until the situation is resolved. Make sure it's clearly understood that the money is a gift, not a loan to be repaid, so you don't create an awkward situation for the gift recipient.
2. Make a Personal Loan
Your family member may approach you and ask for a short-term loan. Talk frankly, clearly write out the terms of the loan on paper, and have both parties sign it. This will help ensure 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.
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 his or her credit requires getting a co-signer? Would you be willing to co-sign on a loan or LOC from a bank, credit union or online lender?
Before simply saying "yes" and essentially lending a family member your good credit, 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 binding 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.
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 his or her finances and ability to repay the loan.
- Meet with the lender in person (if possible) and be sure 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 Budget and Help Create a Bill-Paying System
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 in creating and using a budget as well. To break the ice, you may want to 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, the process will point out places where they can cut back on expenses or try to increase their income to better meet their financial obligations. (To learn more, read "Expert Tips for Cutting Credit Card Debt" and "A Guide to Debt Settlement.")
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 like you would 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.
6. Give Non-Cash Financial 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 will 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 your loved one receives (rent/mortgage, utility bills, insurance premiums, etc.) 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 little extra time they need to work out of their situation.
8. Help Them Find Professional Assistance and Local Resources
You simply may not wish or 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 that 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
The Bottom Line
The most important step is sitting down with your loved one and asking specifically what help they need to work their way out of their current situation. From there you'll have a better idea of the type of information and assistance they need. For example, if they need to make more money, you could help them look for jobs and update their resume. If they need help repaying credit card debt, you could call local credit counseling agencies to learn what services they offer, how much it costs, and how it could benefit your family member.
Family members and money aren't always a good mix. But, in tough economic times or when faced with unexpected emergencies, your loved ones may truly need your financial assistance. Before you commit to helping, be sure to think through what you can and can't afford to do. Remember, if your own resources are limited, there are meaningful, effective and creative ways to help your family members.