Lending to Family: Do’s and Dont’s

July 23, 2019

Financial Perspectives

Lending money to family members can get very uncomfortable. Between dancing amidst hurt feelings and worries about repayment, or lack thereof, the emotional distress is quite understandable. But is it right to avoid lending to family if you’re in a position to help out?

These are some of the potential pitfall involved and possible ways to get around them.

A Lot to Lose—and Gain

There’s a common refrain that family is for sharing kugel with, not doing business. Unlike with interactions with strangers, there is much more than money to lose if something goes off track. But while the concerns of mixing mishpachah and finances are understandable, the Gemara makes it clear that as far as chessed obligations go, relatives come first (Bava Metziah 71a).

Therefore, despite the potential discomfort, it’s proper to maneuver around the risks and concerns of lending close to home and find a way to do it securely. Perhaps the lender can put a buffer in between borrower and lender by using a third party. And, if they do lend directly, they can limit the possibilities for misunderstandings with proper written agreements. Even the emotional landmines can generally be successfully navigated with a proper mind-set and perspective.

Emotions Running High

The concerns about a “close to home” loan are easy to understand. The borrowing party can get bent out shape asking themselves, “Why did they have to rake us over the coals? We’re family!” The lending side, meanwhile, may be questioning the need for a loan in the first place. This issue often arises when borrowers make a simcha on a more lavish scale than the lenders would. While one person’s need is another’s extravagance, those assisting others financially may feel entitled to judge the recipients. Especially with siblings who have dormant hard feelings remaining from numerous interactions over the years, judging or being judged is psychologically draining.

If the loan isn’t repaid on time, it becomes even harder for the lender to remain dispassionate and wonder why loan repayment wasn’t prioritized over a new car, vacation, or home improvement. Also, even if they aren’t being judged in reality, the borrowers may think they are being scrutinized, causing tension as they become prickly and defensive. Although it’s easiest to “just say no,” this goes against the chiyuv of lending to needy Yidden in general and especially family (mibesarcha al tisalem), so abandoning those closest to us just because it’s a bit sticky is not an option.

An Outsourced Solution

The simplest solution to this dilemma may be to outsource the technicalities of the loan to a gemach or another third party who will accept the money, process the loan, and take responsibility for collection and repayment. Putting a buffer in between the giver and taker can make the transaction much less emotional, solving many potential issues. This idea is not a perfect solution, however. Perhaps the borrower is embarrassed to involve other people. Also, while the gemach will have an easier time demanding contracts and cosigners, if the borrower struggles to qualify, it defeats the whole purpose. You may have to make the loan directly and deal with the discomfort head-on, maturely.

Good Documents Make Good Families

Any financial matter needs to be formally documented al pi halachah. Often, people are reluctant to insist on a detailed agreement when dealing with friends and family, fearing it implies a lack of trust and respect. However, the Gemara says that lending money without a written agreement is lifnei iveir, placing a stumbling block in front of the borrower, who may be enticed to contemplate avoiding their obligations (Bava Metziah 75b).

Explicit contracts make for better relations by leaving no room for misunderstandings or disagreements. The need for documentation is, therefore, greatest among those who are close and plan to remain so. Indeed, the Chafetz Chaim zt”l often encouraged people to maintain meticulous contracts, and his tzava’ah is a lesson in using clear directives to avoid machlokes in the family. It is also advisable to have the loan process reviewed by a competent Rav to ensure compliance with hilchos shtaros, hilchos ribbis, and lo sihiyeh lo k’nosheh.

Attitude Is Everything

As with most things in life, the primary requirement for successful family loans is maintaining the right attitude. The lenders should feel grateful that they have the ability and the opportunity to do a mitzvah while helping those they care about. Being dan l’kaf zechus goes a long way too. This includes recognizing that everyone has quirks and their relatives are probably doing the best they can within their limitations.

And if the money isn’t repaid in a timely fashion, rather than stew about the unfairness of it, the lender might want to think about whether they’d perhaps be willing to gift (instead of loan) the money to a family member in serious need. Often the answer is yes, and if so, they can mentally walk away. Even if they can’t afford to write off the funds, as they wait for repayment, they should look at the bright side of things. Once they’ve done the mitzvah, they might as well be happy about it.

Thanks to my brother, Rabbi Baruch Fried, dayan with the Bais HaVaad of Lakewood NJ, for his input and review of this article.