Loans to Family Members

Q. You have written that those close to us have precedence in charity, and that a loan is often the best form of charity. Should I try to help a needy family member by giving a loan?

A. Certainly family members have precedence in charity giving. In a recent column we explained that while all needy individuals are worthy charity recipients, in general we should give precedence to those closest to us, and family members are in the inner circle -- "charity begins at home." In addition to this general rule of "priority according to proximity", there is a specific plea of the prophet Isaiah "don't hide from your own flesh" (Isaiah 58:7).

Loans are a praiseworthy form of aid because they don't shame the recipient and don't undermine independence and initiative.

However, great care is needed in giving loans. In Judaism, it is the responsibility of the borrower to pay back the loan, and Scripture tells us that it is "a wicked borrower who fails to repay" (Psalms 37:21). But it is also the responsibility of the lender to make sure that the repayment conditions are adequately recorded and proven. The Talmud tells us, "Anyone who has money and lends it without witnesses, transgresses the verse, 'Don't put an obstacle before the blind' (Leviticus 19:14). Reish Lakish says, he brings a curse on himself." (1) The passage goes on to explain that this applies even to a loan to an upright and reliable individual.

Anyone who takes a loan is liable to forget about it altogether, to recall the conditions (sum, repayment date, etc.) inaccurately, or to imagine other lenient considerations. Since this is part of human nature, it is incumbent on the lender to make the terms clear so as not to inadvertently encourage this kind of irresponsibility on the part of the borrower.

Similarly, the same chapter of the Shulchan Arukh (the authoritative code of Jewish Law) which explains that it is a mitzvah to lend to the needy, even more than to give them charity, states that we should not lend if the likely result is that we will dun the borrower when he or she will be unable to pay. (2)

This caveat is particularly important regarding loans to family members. Research shows that default rates on such loans to family members are very high, and that this applies even to third-party loans merely co-signed by family members.

So: If you really just want to help out a needy family member, and the vehicle of a loan is merely a way of making the recipient feel better and give you a chance to get the money back if your relative has a stretch of good luck, by all means lend the money, and let your relative know, "Pay me back whenever you can." Since you didn't specify an exact time for repayment, the borrower will never be technically in default, and so you haven't created a situation where your relative is likely to act dishonestly.

But if you are giving a loan in order to make sure that the borrower takes seriously the need to get on his feet financially, or because you really need the money later on, you should make clear to your relative that this is a serious loan. Make sure every aspect of the transaction is documented, and emphasize that in case of default you plan to take normal collection action on the loan. There is no shame in making this threat, and no shame in actually making the same collection actions as you would in any normal loan. You lent the money and you are entitled to get it back.

Involving a third party is no guarantee of compliance, as we mentioned above, but many people do find that it does improve repayment rates and diminishes friction among family members because it is the third party which sends collection reminders. There are special agencies whose main business is to facilitate and intermediate such loans, and some have extensive experience in dealing with the problems.

Helping out a needy relative with a loan to give him breathing space is a wonderful mitzvah. But particularly in this case, "loan oft loses both itself and friend", and you need to take concrete steps to avoid this all-too-common outcome. If you expect your money back, take your mitzvah seriously and make sure the borrower understands that you have the ability and the intention to enforce your rights. In this way, both you and the borrower will benefit and relations between you will be strengthened and not strained.

SOURCES: (1) Babylonian Talmud Bava Metzia 75b. (2) Shulchan Arukh Yoreh Deah 97:1,4.