Family Loans - lessons learned

Are family loans a good thing? Are they acceptable? Are they wise? How should they be handled?

Let's take a look at two real life examples of what happened to someone I know when family members approached and asked them about lending money for their emergencies, and the favor was extended.

I'll not pretend that these examples are typical, but they certainly have something to teach us all about lending money.

First, let's go over my advice about lending money to a friend, because it applies here as well. This advice comes from the frugal living lending department - a place with experience in these matters. The advice is quite simple, you lend money if you're a:

  • bank
  • a member of the family
  • a lifelong friend

Okay, this qualifies, so let's revisit the other considerations for lending money. Here they are:

  • What's your vested interest in the relationship?
  • What's the integrity of the other person?
  • Are they responsible for their condition?
  • Who really should be lending that person some money?
  • Will they come back for more?
  • Are you helping or enabling?
  • What's the motivation of the person?

These are all still valid for family loans, so let's keep them in mind.

Family Loans - example one

This is a true story. Nothing is made up, however, I've left names and places out of the story for obvious reasons.

There once was a niece and an aunt. They were close. The niece was closer to her aunt than her mother because her mother hadn't been very supportive. After graduating college, the niece moved to the same town as her aunt, instead of returning to where her family lived or selecting another place to start her life after school.

The aunt loaned the niece money to purchase a car for job hunting and getting around. The aunt gave the niece furniture for her apartment. The niece made payments to the aunt. The payments were small, and were made infrequently.

One day, the niece asked the aunt for relief from payments until she could get caught up on other bills. Relief was offered for the remainder of that year.

Later, the niece asked the aunt for money to move back home because she was going to break up with her boyfriend. The breakup never occurred, she never moved back home, and the money wasn't returned.

Total money owed with these family loans is many thousands of dollars. It's been years since the two have talked regularly, and there doesn't appear to be any signs that the money will ever be returned.

The niece isn't fond of working and can't seem to stay focused in a particular line of work or a particular job for very long.

This might not be typical of family loans, but we can still learn some lessons here. What are they? From my vantage point, I can see several. Here they are:

  1. Even with a family member, you still have to know what kind of person you're dealing with. Obviously, the aunt didn't know that the niece lacked integrity. She knows now, quite clearly.
  2. Payback schedules for family loans need to be assigned when you're lending any amount of money. No schedule was assigned in this case, and everything seemed to go exactly as scheduled.
  3. When you're dealing with thousands of dollars and years to payback the amount borrowed, interest needs to be assigned, even to family loans. That would have made it a more serious loan, and it might have motivated the niece to make larger and more frequent payments.
  4. Why didn't the niece get money from her mother instead of her aunt? That should have been the first clue of trouble. Perhaps the mother knew better than to loan money to her own daughter.
  5. The niece came back for more money and her irresponsibility was enabled by the aunt who thought she was being helpful.
  6. In light of the failure to give back that emergency "move back home" money, it's clear that the niece was "playing" the aunt all along for more family loans, without any intention of paying it all back. When you're a player, you play the ones you can, even if they're family.

For me, the big red flag is when a person can't get a loan from their immediate family, especially the very woman that gave birth to the person. That should call into question the idea of family loans, right from the get-go.

If the immediate family has no interest in lending money, it's probably time for the extended family to take a hint and forgo family loans.

If the aunt had followed some of the suggested guidelines of personal lending, I think some of the heartache and hard feelings could have been avoided in this situation.

The video below gives us some guidance about family loans that is independent from my views, and as near as I can tell, the advice given here is consistent with some of my guidelines.

Family Loans - example two

This is another true story. Only the names and places are made up for reasons that should be obvious.

Janet and Elaine are sisters. Janet depends on Elaine for advice and counsel. Janet also counts on her for money to make it through lean times - lean times created in part by her own poor choices in employment and spending. Janet doesn't heed advice from Elaine, even though she asks for it. Janet has lived on the financial edge her entire adult life.

The two sisters lived near one another years ago until Elaine moved many states away to get away from having to be the guidance counselor and loan officer for Janet. Nevertheless, Janet continues to seek advice and money from her usual source, now thousands of miles away, even though the rest of her immediate and extended family still live within a few hours drive of her.

Loans between the sisters had always been paid off in a timely manner, and multiple loans were made. Despite counseling, Janet continued to live on the financial edge as a result of her poor choices.

Living on the edge finally caught up with Janet and she lost her job. Elaine came to the rescue repeatedly, even though she too was unemployed and had no business dipping into her modest savings that she had put aside to help herself ride out unforeseen financial turmoil.

Janet doesn't ask any other family members for help. She simply counts on her usual source of emergency funding - Elaine, who tries to enlist the help of other family members living nearby, but gets little response.

Janet is finally put on notice that she'll get no more financial assistance from Elaine. She'll have to sink or swim on her own. Janet cashes in her retirement savings, and that funds herself for the next month.

Finally, one family member offers to have Janet move in with them until she can find a job.

What can we learn from this story? Here is my take so far:

  • There was no reason for Janet to change her "on the financial edge" approach to living because she was being enabled through funding from Elaine.
  • Other family members must know something that Elaine isn't admitting to herself if they are so reluctant to help. I'll bet they see Janet as a tar baby. I know that I do.
  • Janet did one responsible thing - she cashed in her retirement so she could take care of herself instead of asking others for money.
  • The fact that her retirement savings could only carry her for a month is a clear indicator of just how much "on the edge" Janet was and is living. It's life for the moment, and essentially no preparation for a future.
  • Elaine made a wise choice to finally stop enabling her own sister to live irresponsibly. This is the wake-up call she needs.
  • Janet needs a wake-up call and she's in for one now, but will probably never learn a lesson from any of this. Some folks just don't get it, and they never will.

On the About page of this website, it's states, "I share the good, bad, ugly and bizarre to provide a wide spectrum for your review." The two examples of family loans above have a little of each it seems. Both situations are troubling, but you can see that both were created by bad decision-making by the parties involved.

It's also clear that the same caution is warranted with family loans as it is when you are lending money to a friend. You need to be aware that once "fed" the other person will likely come back. And, you need to be careful that you're not enabling the other person to be irresponsible.

You don't have to be a frugal living expert to see that the way the niece and Janet live aren't good examples to follow. You can't pick your family, but you can select to whom you're going to give family loans. It is your right of choice.

Done with Family Loans, take me back to Managing Money

There certainly is a broad scope of topics here at Frugal Living Freedom. When you think about it, money permeates so very many activities in our lives, therefore, being frugal encompasses a wide range of interests, from being employed to taking a vacation, and just about everything in between. Enjoy the variety, pick up some new ideas, and start making frugality a part of your signature.

I'm a big proponent of being debt-free, and I mean entirely debt-free - no mortgage payment. It's not essential for financial freedom, but you'll love the feeling once you get there. If you didn't have a rent or mortgage payment, how much more could you do for yourself with your current level of income? I suspect plenty.

If you ever hope to see an abundance of wealth, you need to plug the hole in your boat. The wealthy don't necessarily make lots of money, instead, they know how to hang onto what they make, and make it work for them.