This is actually a very hard question to answer. If you really cared about the person asking for money, your immediate response would be to say yes and allow them to borrow from you. However, if you let your head rule over your heart, you would be inclined to say no.
According to a survey, 8 out of 10 Americans will not lead a family or friend some money to start a business. If these people are unwilling to finance a business, what more if the money is intended to be used to consolidate debt? A business has the potential to pay back what is borrowed. Debt, on the other hand, is not as promising. In fact, it shows evidence that the borrower may be irresponsible with the way they handle their finances. If the latter is true, would you really trust that person with your money? What makes you think that they will act responsibly with their money this time?
Why a family loan for debt consolidation can be dangerous
There are many reasons why a family loan is highly discouraged. Even if it will help a loved one consolidate debt, you need to think twice before you agree to help them. Here are three reasons why using a family loan to finance a debt consolidation strategy is not a good idea.
You are not helping them get to the root of the problem
First of all, you are not really helping by providing the funds to pay off the debt. You need to get to the root cause of the problem. Otherwise, your loved one might make the same mistake again and end up landing in debt once more. When done correctly, consolidating multiple debts will do more than just help you get out of debt. It can also make sure that you learn the financial habits that will allow you to stay out of debt. Do not give your loved one an easy way out by providing them with the easy money to consolidate debt. They need to learn how hard it is to pay off debt – that way, they will be motivated to be smarter when they borrow money.
You are endangering your own finances
Another reason why you should not agree to a family loan is that you will only endanger your own finances. It does not matter who is borrowing from you. When you lend money to someone, there is always a chance that they will not pay you back. If you allow them to borrow from you, it is important for you to consider the consequences of not being paid. Will it compromise your financial security? If it will, then that should be more than enough reason for you to say “no” to the person borrowing from you. It will not make sense to save someone’s finances if it will leave your own vulnerable.
You are putting your relationship at risk
This is probably the most important reason to avoid a family loan – you will put the relationship at risk. Money fights are not uncommon among family members. In fact, a survey revealed that siblings have conflicts over money. We also know that this is a huge cause of stress between couples. If you want to preserve your relationship, it is better to just say “no” to that person who is borrowing from you. This will help you avoid any feelings of resentment when that person ends up not paying you back.
Of course, you may be thinking, saying “no” can also destroy your relationship. The person asking help from you will feel resentment because they will feel like you abandoned them in their time of need.
The truth is, you are not encouraged to give a family loan to help consolidate debt. But that does not mean you will not help. You can still provide help and it does not even have to involve money.
How to help loved ones consolidate debt
There are three ways for you to help a loved one struggling with debt. This might even be more beneficial than lending them the money that they need.
Educate them on what they should do
One way to help is to give them debt consolidation lessons. Even if you do not know a thing, you can learn with them. Find out what the options are and help enlighten them of the best choice based on what they can afford. You might want to look beyond the options to consolidate debt. You can also look at their financial situation and identify areas that they can improve. If they do not have a budget plan, you can help them create one. Point out mistakes that might compromise their ability to completely pay off their debts.
Teach them the right financial habits
Giving them a list of the financial habits they can learn is also another thing that you can help them with. If they think that you have the money to lend them, that means you are good enough in managing your finances that you ended up with extra money in the bank. Teach them how to accomplish that. Give them tips on how you manage your money and that might be the key to help them avoid too much debt in the future.
Give them emotional support and encouragement
Finally, you can simply give them your emotional support. Believe it or not, this can go a long way. Be the voice of reason in their life. Work closely with them as they pay off their debts, making sure that the right decisions are being made. When they are feeling discouraged, give them the motivation that they need to keep going. Remind them of why they need to keep on paying and stop them when they are about to make things worse. As you go through every step with them, it can possibly bring the two of you closer. That is more valuable than the money that you could have lent them to consolidate debt.