How should you handle requests for loans from those you love?
We all know how “’tis better to give than to receive,” and how wonderful it feels to be able to make a positive difference in the lives of those close to you. Nonetheless, even if you are living comfortably in retirement, depleting your assets by giving in to all requests from those short of funds may be a big mistake. For most people, open-ended giving can be a disaster, resulting in their inability to pay their own bills.
When Lending Becomes Serious
All of us should feel entitled to pay for a relative’s gas on occasion, or “lend” money to a son, daughter, niece or nephew for an important new purchase presently out of their financial reach. In many cases, friends and relatives are true to their word, repaying money they’ve borrowed in a timely fashion. But what if they’re not? One important question to consider is whether you can manage without the amount lent if it’s never returned. Usually, small amounts are not problematic — $20 or $40 here or there. Always be aware, however, that repeated unpaid “loans” can add up to tidy sums.
Demographics of Lending
There appears to be a disparity in the habits relating to lending among different communities. About 35 percent of black households report providing assistance to those outside their immediate family, as compared to 25 percent of white households. Slightly fewer Hispanic households (24 percent) report making loans of this kind. Interestingly, 75 percent of Hispanic households who help out experienced a feeling of being burdened by the act.
From the opposite point of view, approximately one out of four Americans report receiving some money during the previous year from a friend or relative who doesn’t live with them. These statistics come from the 2014 Pew Charitable Trusts’ Survey of American Family Finances and the Panel Study of Income Dynamics at the University of Michigan Institute for Social Research. In this study, which followed 7,845 people, the median amount of assistance was $1,000.
On the one hand, this study shows a sharing of wealth among intimates. Those who had experienced financial hardship during the year were five times more likely to have borrowed money to tide them over. The problem arises when the lender himself or herself experiences financial difficulties and needs the money that was lent returned. This is where not only financial arrangements, but human relationships, take a tumble.
Preventing a Financial or Emotional Crisis
Before you lend money to a friend or relative, experts recommend that you consider the following questions:
- Is your own retirement account fully funded?
- Do you have enough money to fund yourself in an emergency for 3 months to 1 year?
- Do you pay off all your credit cards in full each month?
- If you give or lend someone the amount requested, can you afford to lose it completely?
You should always be aware that, even with the warmest feelings and best of intentions, the loved ones who borrow from you may not be able, or willing, to pay you back (or to pay you back at the time you want them to). Therefore, it is always best to lend an amount you can do without.
Before lending any large amount of money, even to a loved one, you should consult with a reputable estate planning attorney who will be helpful in guiding you through your options. It may make sense for both parties to sign a binding legal document so the terms of the agreement are fully understood and adhered to.