Every once in a while, someone will ask me about lending money to a close personal friend or a family member. They usually bring it up because they are conflicted about it. Some ask hoping I'll give them an excuse to say no, as in "I'm sorry…my financial advisor says I shouldn't do that." Others are looking for advice to make them feel better about doing something they know they probably shouldn't.
This may sound harsh, but if you want to lose a friend or alienate a family member, start lending them money. Lending money to family or friends invites a level of drama into the relationship that isn't difficult to imagine. Even with the best of intentions, loans can drive a wedge between people. Here's one out of a million possible scenarios to highlight my point.
Suppose your brother comes to you asking for a loan to buy a car. You love your brother. He has had some tough breaks and you want to help. After mulling it over, you finally decide to make the loan. Your brother is grateful for your kindness. He can't stop thanking you and promises to pay you back as soon as possible.
Sure enough, your brother works hard and his financial situation starts to improve. You are proud of him and you are glad that you helped him when he was down. As his situation stabilizes, you anticipate that he will pay you back, but you soon discover his idea of "as soon as possible" is different than yours. Months go by without repayment. You drop a hint, but he doesn't respond. You notice and begin to resent the things he buys instead of repaying you – a new video gaming system, a vacation to Las Vegas, a new television. He senses your growing disapproval and starts to avoid you. He knows he needs to repay you, but he is enjoying the fruits of his hard work. When you see each other at family gatherings, you don't know what to say, so you don't say anything. When you try to bring it up, he gets defensive. You both wish you had never made the loan.
It can take years to repair that kind of damage and sometimes those wounds never heal. That is why I think it is better to avoid the problem all together. So, what should you say when a family member or close friend asks for a loan? Here are four possible approaches that can help you navigate that emotional mine field.
- Communicate. In emotionally difficult situations, communication is vital. Take time to understand the need and why they asked for the loan. After you make your decision, explain it clearly and kindly. This might be a difficult conversation, but it is your best chance to avoid misunderstandings.
- Saying no. There are many ways to say no, but saying it clearly is the best way to avoid misunderstandings. You might say something like, "I'm sorry, but I never lend money to family or friends." If saying no is difficult, your financial advisor may be able to help. You can say, "Loan requests from family and friends are handled strictly by my financial advisor. Please see her." Most financial advisors will not have trouble saying no and a conversation with a financial advisor may be exactly what the person needs.
- Saying yes. If you decide to make the loan, get it in writing. You should have a formal written agreement that spells out what the payments will be, when they are due, and how much interest is being charged. Make it clear from the beginning that you are counting on them to take the agreement seriously. Helping them learn to be accountable for their financial decisions may be more important than any loan you make.
- Help in other ways. If you can afford it and can do it without resentment, you might consider making an outright gift of the money they need. They could still eventually repay you, but eliminating the expectation of repayment might ease the drama for everyone involved.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.