15 May My sister wants to borrow money. What should I do?

Q. My sister is asking to borrow $25,000 so she can buy a home, and she says she will be able to pay me back by the end of the year. That’s about half of the money I have in cash that I am using to pay college tuition. I have two more years to pay or a total of about $30,000. If she doesn’t pay me back, it will hurt. I’ve never loaned her money before. What should I do?
— Sibling

A. Loans to family and friends can be very sticky business.

Even if everyone has the best of intentions, so much can go wrong.

As a rule of thumb, “don’t do it,” said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

“Certainly, there are situations where it is reasonable to break this rule, such as when there is a financial emergency,” Novick said. “However, purchasing a home is far from an emergency situation.”

It can take years to accumulate enough cash for a down payment, to build up enough credit history to qualify for a mortgage and to generate enough regular income to cover the mortgage payments, property taxes, homeowners insurance and maintenance, Novick said. So lending money to your sister may seem like a reasonable shortcut but could lead to big problems later, he said.

“If your sister doesn’t repay the loan in a timely manner, not only could it negatively impact your ability to cover upcoming college tuition costs, but it will likely damage the relationship with your sister,” he said. “Since she claims that she will have enough to repay you by year-end, then she should just wait until year-end to buy a home.”

However, if you cannot resist the urge to help her, then make sure you only lend as much money as you can afford to never see again, he said.

Additionally, he said, get the loan amount and terms in writing and signed by both parties.

“Remember, the interest earned on a loan is generally considered a taxable event,” he said. “In addition, if you forgive part of the loan balance or accept a below-market interest rate — including a no-interest loan — you may need to report it as a gift.”

There may be another option, but this, too, should be approached with caution.

Those in need of financial assistance also often ask friends or relatives to co-sign a loan, Novick said.

“This may seem an easier way to help than lending money because you are only signing a piece of paper,” he said. “However, it is a risky proposition because you, as co-signer, are legally responsible for the entire loan if the main borrower doesn’t pay it back. So this could turn into an even worse situation than just lending money to a friend/relative.”

Email your questions to .

This story was originally published on May 15, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.