Question: I am not independently wealthy, but I have enough to be comfortable. My brother has always struggled with money. Recently, he asked me to lend him money to help buy a car. What should I tell him?
Answer: In my experience, loans to family and friends tend to complicate relationships and often lead to misunderstandings. This may sound harsh, but if you lend money to a friend, you had better be prepared to lose a friend. And if you lend money to family, chances are you are setting yourself up for some unpleasant drama.
The drama isn’t difficult to imagine. You mentioned your brother struggles with money, which is probably why he came to you for the loan. Let’s suppose you decide to make the loan and your brother promises to pay you back as soon as possible. You soon discover his idea of “as soon as possible” is different than yours. Months go by without repayment. You drop a hint; still no repayment. You start to notice and 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. You see each other at family gatherings, but you don’t know what to say, so you don’t say anything. You both wish you had never made the loan.
Can you see how the loan becomes a wedge in your relationship? Even if you eventually forgive the loan and are able to forget it, your brother probably won’t. It can take years to repair that kind of damage.
So, what should you say to your brother? Here are four principles to help you navigate that emotional mine field.
1. Just say no. There are many ways to say no, but the direct route is often the best. 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, “Loans requests from family and friends are handled strictly by my financial advisor. Please see him.” Most financial advisors will not have trouble saying no and a conversation with a financial advisor may be exactly what your brother needs.
2. Communicate. In emotionally difficult situations, communication is vital. Take time to understand your brother’s need and why he asked you for the loan. After you make your decision, explain it clearly. This might be a difficult conversation, but it is your best chance to avoid misunderstandings.
3. Get it in writing. If you decide to make the loan, 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 your brother to take the agreement seriously. Hold your brother to the schedule.
4. Help in other ways. If you can afford it and can do it without resentment, you might consider giving your brother the money he needs.
When a loved one asks to borrow money, the emotional landscape suddenly becomes very difficult. By applying these principles, you can prevent misunderstandings that sometimes undermine important relationships.
Steven C. MerrellMBA, 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, CA93940 or email them to firstname.lastname@example.org.