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One of the most difficult financial situations to deal with is when one person in the relationship is in a much stronger financial position than the other. In this article, I am going to review when it’s smart to lend money to your significant other and when it could be a disaster.
Why We Hide Our Money Problems
When you choose to spend your life with someone, you are also choosing to merge your finances, including your debt. Many couples are making that choice without all the relevant facts.
Manulife, a financial services firm in Canada found that 20% of people in marriages or common-law relationships confessed they are hiding debt from their significant other.
The primary reason people hide their money problems is that they are ashamed. They are embarrassed that they are not doing as well as they think they should be. This is especially true for men, many of whom are locked into financial gender roles from another century. If you’ve told yourself you are supposed to be the “breadwinner” of the house, it’s difficult and unpleasant to confront the reality that you aren’t.
What to Do When You Discover Your Partner Is in Debt?
When Trish and I decided to buy our first house was the first time we had to lay all our financial cards on the table. We had talked about money in the past and knew some general information about other’s finances.
- How much the other made.
- What retirement and insurance benefits the other had through work.
- How the other person generally managed their money and spending habits.
- The only debt either of us had was my student loans.
But we had not discussed the exact amount of those student loans.
Applying for a mortgage requires each partner to reveal the details of their finances. You can’t get a mortgage without telling your lender what other debts you currently have. And if you’re applying for a mortgage with another person, that means they get to see exactly how much debt you have.
As part of the mortgage application process, I revealed that I still had $11,000 left on my student loans (down from $50,000) and that I was paying 8% interest on that debt. I was in the process of aggressively paying it down and relative to my income it was easy to manage.
I also knew she had about $25,000 sitting in her checking account and that the optimal use of that money that was earning 0% interest would be to use $11,000 of it to eliminate the debt at 8% interest.
However, given my desire to never be a burden on anyone I would never suggest this obvious course of action. I was content to continue paying the loan down myself.
During the process of getting pre-approved for a mortgage, we had to review all our finances with our mortgage agent. She quickly pointed out what I had noticed and suggested that we use some of the cash in Trish’s checking account to pay off my debt as this would maximize our chances of getting approved for the mortgage.
Getting rid of my student loan would increase our odds of getting a mortgage for two reasons.
- One of the factors lenders look at when considering any loan application is how much debt you currently have and how much of your income is required to service that debt.
- I had a long history with this loan which included missed payments in the past. The missed payments were far enough in the past that it did not have a significant impact on my credit score, but clearing that loan looks good.
This idea of using her cash to pay my debt had not occurred to Trish (unlike me, she has better things to do than obsess over money). Due to her caring nature, she immediately insisted that we use her savings to pay off my student debt.
In the End, We Decided It Made Sense for Us
After a lengthy discussion, we decided that she would use $10,000 of savings and I would use an extra $1,000 I had saved up to clear the student loan debt, once and for all.
Soon after that we had an accepted offer on a house and signed a 5-year term on our mortgage, so we decided that I would pay her back $10,000 over the five-year mortgage term. $166 per month for five years.
We are four years into that agreement and to be honest our financial position has grown so much stronger, that we both admit it’s almost silly to continue with this because the $166 is not making a material difference in either of our finances (we are fortunate in that regard).
When Lending Money to Your Spouse Is Smart
It’s critical to understand three things about your significant other’s relationship with money before you consider lending them money:
- The current state of their finances,
- Their current financial habits, and
- Their financial goals
For us, it was a no brainer for her to lend me the money for four reasons.
- Apart from the student loan, I had no debt.
- I am a frugal person and always spend less than what I make.
- I make very detailed financial goals which included paying her this money back.
- Her lending me the money allowed us to move our relationship and finances forward by buying our first house.
Put simply, I had the means to pay her back, I could be trusted to pay her back and the loan served a strategic purpose that benefited us both. If those conditions are met, lending money to a spouse is a smart idea.
When Lending Money to Your Spouse Can Be a Disaster
If your partner is in deep credit card debt, spends more money then they make, fails to pay their bills on time and have no financial goals, you may want to avoid lending them money.
You need to ask two critical questions before lending money to a spouse.
- Does this person have the financial capability of paying me back in a reasonable time frame?
- Do I trust them to pay me back?
If the answer to either of the above questions is anything but a definitive “yes”, I wouldn’t do it.
If you lend money to someone you love and they fail to pay you back, that is a breeding ground for frustration and resentment. You put yourself at risk for losing both the money and the relationship.
Final Thoughts: Is It Smart to Lend Money in a Relationship?
Managing finances inside a relationship is hard. It’s particularly hard when each person in the relationship is not on even footing from a financial perspective.
While there is no hard and fast rule on lending money to the other person in a relationship, it’s important to consider a few simple questions.
- Can this person pay me back in a reasonable time frame?
- Do I trust this person with 100% confidence to pay me back?
- Is lending money to this person moving your relationship or your financial position forward?
- What is the likelihood that this person will fall into debt again in the future?
Have you ever lent money to a friend, family member or loved one? How did the situation turn out?
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
About the Author
Ben Le Fort
Hi, my name is Ben. I am the founder of Making of a Millionaire. I have been obsessed with personal finance and learning how to manage money, ever since my parents declared bankruptcy and lost the family home to foreclosure in 2010.
I spent the next 10 years continuing my journey of educating myself about money. This education was both formal and informal.
On formal education, I earned a Bachelor’s and a Master’s degree in Finance & Economics.
On the informal side, I consumed every book, video, blog post, and podcast that discussed personal finance.
Education was nice, but it wasn’t until I began implementing what I learned that I began feeling more hopeful about the future.
Before long, I had paid off my first loan. Then the next. By 2015 I was debt-free. By 2016 my wife and I bought our first house. Then we started investing. We bought another house and began building real wealth.
As our wealth grew, the memories of that family bankruptcy seemed further and further in the rear-view mirror. My stress and anxiety began to melt away and I was able to sleep at night without my mind racing and problem-solving.
By 2018 I knew it was time to start sharing what I learned about managing money and Making of a Millionaire was born.
I hope you find the articles, videos, and courses created by Making of a Millionaire to be of value to you. Please feel free to reach out to me directly if you ever have feedback or questions.
You can read all of my articles on my personal site, or on Medium. If you’re interested in video-based personal finance tutorials and education, you can Subscribe to my YouTube channel or check out my in-depth personal finance course.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.