Karen Telleen-Lawton: Factors to Consider Before Lending Money to Friends, Family
Examining your finances takes fortitude. What are your goals and dreams? What can you afford? Here is another question I’ve heard in my financial advisory practice:
Dear Karen: We have three kids — one married, one single and one still in college. The married one (“Jane”) and her husband (“Joe”) recently asked us for a loan to help with the down payment for a house. Jane and Joe are very responsible, and I have no doubt we’d be paid back. But my husband is worried about setting a precedent. In particular, if our “baby” found out, he’d be asking for parity the next day, and we might never see the cash again. What do you suggest?
— The Bank
Dear Bank: You could fall back on that William Shakespeare soliloquy by Polonius in Act I of Hamlet: Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry. This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.
As Polonius warns and you have foreseen, loaning money can be fraught with unintended consequences. Nevertheless, it has the potential to be a joy to both the lender and the borrower, if approached carefully.
» Do not risk more than you can afford to lose.
» Do not dip into your retirement account.
» Reach an agreement with your partner in the decision.
» Evaluate the impact the loan will have on your other children. Incentives can be viewed as punishments and rewards as bribes. Try to define guidelines for your family that you’re willing to apply to all your kids. Under what circumstances would you considering making a gift?
» Consider the reason the borrower needs the money. Education? Down payment? Medical costs? A loan should have a reasonable expectation of being paid back.
» Don't be an enabler. Don’t loan money to someone who isn’t responsible with money. It will hurt them, you and your relationship.
» Do not making judgments on the borrower's spending decisions.
» Do not agree to co-sign a loan unless you’re willing to become responsible for it.
» Check on possible tax and estate consequences.
I still remember my husband asking his stepfather for a home down-payment loan 35 years ago. He was reluctant, there being three more boys to follow, and we didn’t relish being in his debt. But he made the loan, and we signed a repayment agreement. We scrimped and paid it off in half the time by scrimping.
Some years later, friends of ours asked us for a loan, and we reluctantly refused. The amount would have been a significant chunk of our savings, and we were afraid that failure to repay would have cost us our friendship. Indeed, we are still friends with both of them 25 years later. Given what we know now about their situation then, I believe the gift would have been “enabling.”
Bottom line, the details are important. If you follow your heart and your mind, you can lend wisely and give joyfully.
— Karen Telleen-Lawton’s column is a mélange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.