by Larry Wiener
When should you loan money to friends and family? There is no easy answer, but here are a few points to consider.
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The call was inevitable, but I still wasn't totally prepared for it.
"You know it's been tight since I've laid off. We have a house payment due on the 15th. We e-filed our income tax return and should get our refund by the end of the month which will more than cover. Can I borrow $1500?"
Their financial position was a result of mistake after mistake after mistake. I certainly didn't want my good friends to lose their house, but I didn't want to continue enabling irresponsible behavior. I have worked hard to get to a position where I have extra money and enjoy sharing, but I don't want to be taken advantage of. These are dear friends.
When I called back, I expressed my concern about enabling something that shouldn't be. They understood my point and the income tax refund had arrived, so there was no need for the loan. But then there will be next month.
I'm sure calls like this cause dilemmas to people hundreds if not thousands of times a day. You want to be supportive of your friends and family, but you wonder if by extending credit, you will be subsidizing something that should not be.
You also know that nice Aunt Franny may not be the first creditor your nephew is going to pay back. You don't have the enforcement mechanisms of the mortgage company or landlord, the IRS, or the bank who holds their car loan. You may be remembering the last time you loaned money to a family or friend and it just didn't work out.
When should you loan money to friends and family? There is no easy answer, but here are a few points to consider.
Just What Are You Funding?
Anytime you advance money, you are funding either a continuation of a lifestyle or a change. Decide whether this is a change you want to fund.
Does Junior need a new car because he goes six months without checking the oil? Is this the second car this has happened with? Maybe you need to get his attention in other way.
Perhaps, on the other hand, another Junior just got out of law school. He did well and just got a great job with a prestigious law firm. He doesn't have much money, but has some start-up needs (e.g. moving expenses, new clothes, etc.) Financing some of those start-up costs might be useful. He will have immediate income. He has a history of handling money well. You might want to give him a hand by helping him finance these startup costs.
Wisdom from Old Proverbs
An old proverb goes something like this: Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime. (As featured on the home page of this site.) If I were to add a clause for borrowing, it would be "loan him money to buy fish and who knows what will happen."
People borrow money for all kinds of reasons, many of them not so good. Here are a few situations.
Let's go back to Junior with the car. What Junior really needs is a good lesson in how to take care of a car. You may want to ground Junior's wheels for awhile, enroll him in a car care course, and then help him pay for the repair of his car, either partly through a gift or partly through financing. You might want to remind him once he gets his car up and running what he needs to do to take care of it. That way Junior has a skill.
Another situation I often hear about is where children who grew up in affluent homes feel they are entitled to start our with the standard of living their parents attained in middle age. One of my colleagues at work actually took on an extra duty assignment so that her son and daughter-in-law could buy a very expensive refrigerator. I have heard of other adult children wanting to borrow money from their parents for furniture they can't afford.
Better would be to do something like this: Give the adult child a hundred or two for a wise household purchases fund. Then take some time and teach him or her how to use classified ads and other sources to get deals.
Most people who are in a position to loan significant amounts of money got there through hard work, investment, and thrift. You will help your friends and family get there a lot more effectively if you pass on those skills, possibly with a little financing and some gifts combined with counsel, than you will be if you loan money that may or may not come back.
Interesting that recently several of the Rockefellers, Warren Buffet, and a number of America's most wealthy are speaking out against the repeal of the estate tax because they realize that truth.
Some people always seem to need to borrow money because they don't have financial skills. You are better off helping them learn those financial skills than by bailing them out. One family I know was heavily in debt because of financial mistakes early in their marriage. They moved to smaller quarters. The husband took on extra duty assignment at work and the wife took in childcare in addition to caring for their own six children. They couponed massively (with many extra coupons supplied by me on a weekly basis. They made good use of gifts from family. They worked with Consumer Credit Counselors.
After some long and hard work, they got out of their mess. The husband is now thriving in his work and the wife is starting a business. Their marriage is the best it has been in a long time and I think that facing their problems with minimal borrowing set them up for success.
For the Truly Needy
Sometimes you may have someone who is truly down on his or her luck and in need through no fault of his or her own. Perhaps someone sustained an injury that prevents employment for several months. I prefer to give to those people rather than loaning to them. Often I will contact other mutual friends and we find ways to help the person. I would help that person find some other resources that can be of assistance, perhaps through a church or some other agency. I would not want that person to have the burden of paying me back when income just begins to come in. Often I will use my extra coupons to buy groceries for a person in that situation.
Creative Solutions
Sometimes special situations require creative solutions. Take people who are about to lose their house. One solution I have heard of is this: A consortium of friends and relatives buys the house and rents it out to the people. The family gets a little cash infusion as a result of the sale. The consortium provides a lot of counsel and, if necessary, some supervision.
After a time when the people living in the house get their financial affairs in order, the consortium sells the house back to the people. The members of the consortium have made a profit and the once out of control family gets to live in their house and eventually buy it back.
It's tempting to take the easy way out when someone wants to borrow a large sum of money from you. You can run the other way and have nothing to do with the loan--sometimes appropriate if you feel the person is not ready to face his or her problems constructively. Or, you can assess the situation and see what combination of financing, giving, counsel, or other solutions best serve everyone involved.
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Copyright © 2001 by Larry Wiener. All rights reserved.
