All about the challenges of Midlife Finance

Loaning to Family and Friends

It’s the end of the month…or the year. Money’s tight — and your sister (or brother) really wants to get a new laptop. Or car. Groceries. Or a purebred puppy. They need to borrow some cash, and ‘will pay it right back.’

Should you do it?

How unreliable has this sibling been? (Or cousin, close friend, or another person you think of as “family.”) Have they made foolish decisions you shook your head over in the past?

Are they having financial trouble in other areas right now? Is their rent past-due, and their vehicle’s been repossessed?

Are they going through a divorce, or job loss?

Are they willing to do whatever it takes to get back on their feet? Live in a smaller place or get a roommate? Work in fast food or retail for now, to pay the bills? (The answer to this question is usually an eye-opener.) Cut down on expenses like going out of eat, fancy cellphone plans, or cable tv?  

Are there kids involved in this equation — children you especially care about?

Any negative answers to these questions should give you serious pause.  But there’s one more question you should ask — yourself.

Can you afford to do it?

“But it’s my daughter,” you whimper quietly. “I hate to see her suffer — and there are my grandkids to consider.” Maybe you do make that loan — but as a no-strings-attached gift. (You wouldn’t want her restricting your access to the grandchildren, just because she can. So why would you do it, money-wis,e to her?) But…you worked hard for that money. It’s your responsibility to use it wisely. If she won’t (or can’t), perhaps the kindest answer in the long run is the true one: “Honey, I just can’t afford it. You’ll have to figure something else out.” Then help her do it. (There are plenty of how-to-save posts on the MLF site that can help; just put in “saving money.”)

If you do decide to to make a loan:

*Draw up a contract. Be specific on terms of repayment. (Some people recommend doing the loan through Prosper or another lending company; it may be worth the extra hassle and fees.)

*Charge interest. Many people feel uneasy about this, but it does reinforce taking the loan seriously. (And it gives you a return on money you could have otherwise invested.) Do make your percentage less than the going rate — and feel free to give it back when the loan’s repaid, if the idea really bothers you.

*Face the strong possibility that you won’t be repaid. Can you afford to lose the money?

*If you aren’t paid back, that relationship will probably be affected.  For one thing, that person starts avoiding you…or they do the crass thing and ask for more. (Charles Dickens’ father offered to insure his life to cover all the loans — then when he defaulted, he just said, “Do the needful.” Dickens was forced to rescue his father, as well as other relatives, many times over his life.)

*What if they never thank you — or at the least, acknowledge that you went out of your way to help? Can  you handle that?

No matter what you decide:

Don’t co-sign a loan. For anyone. Even the Bible points out that you “will surely suffer,” and urges you to get out of it as quickly as possible. In essence, when a co-signer is needed, the lender is saying, “We don’t trust so-and-so to pay the loan. But if you co-sign, we know you will.”

Your willingness to help out a family member or close friend is tempting. After all, they wouldn’t let a loan slide into default, would they?

Don’t count on it — they would, whether they initially meant to or not. Unfortunately, we found this out the hard way. We still get notices when a much-loved family member doesn’t pay on her student loan. And to keep our own credit report clean, and our borrowing power strong, we make the overdue payment, instead. (Yes, she knows. She hasn’t reimbursed us. Yet.)

Would we ever co-sign on a loan again for her?  You know the answer to that already.

“Lending money to friends and family a is a generous act,” Get Rich Slowly staffer April Dykman says, “one that could easily backfire and even ruin your relationship. Most of the time when someone is considering a loan to a family member, I think, ‘Don’t do it.’ There can be other ways to help.

Sometimes it is the right thing to do. But is it right now?

That’s what you have to ask yourself.

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