How to Respond When Friends or Family Members Want to Borrow Money

You’re successful, and your friends and family know it. You never seem worried about money. You have a great job, and you can afford all the basics with ease. Congratulations, you are now a target. As much as you might love your friends and family, there are certain people who will bring their financial woes to you because of your superior standing. They might even expect you to become the answer to their own misfortunes or poor decisions.

In reality, not everyone sees money the same way as people who have worked and saved for decades to build their prosperity. There is a tendency in human nature to look for an easy way out of a hard situation, and for some, the “solution” is to borrow more and more money. When friendship or family ties link that person to you, the relational proximity can make it a lot easier for a person in distress to ask you for a bailout.

Life as a target

Some people really do have unfortunate events that require immediate action. For example, someone could get laid off unexpectedly and have a period of unemployment. Or an accident or illness could wipe out a person’s savings. Personal events come in all types. We want to remain compassionate and responsive to our loved ones. This article isn’t primarily about true emergencies. Instead, we mainly want to address the times when someone has not exercised discipline and seeks enablement from you.

Obviously, you do not want to become a judge over your loved one’s life choices, but you may have a sneaking suspicion that that unfortunate person’s money troubles were in part self-caused. Depending on your personality, you may simply quiet the voice telling you to watch out and take the path of least resistance, which is to lend a helping hand. You immediately get effusive thanks, feel a blend of awkwardness and pride for being the answer to their problems, and swear to yourself it’s the last time. Except it may not be, and you may kick yourself for getting played if you haven’t set good boundaries.

How can you determine when to help and when to exercise “tough love” when someone asks you for money? Below we describe some situations where one or the other makes sense. Throughout the article, we’ll provide helpful tips for how you can respond compassionately without being the fool from whom money parts easily.

Small loans and gifts

If someone close to you needs a small-dollar loan, it may be best just to offer it one time as long as you can comfortably afford to lose that money. By comfortable, we mean both financially and emotionally. It’s not worth a lifetime of resentment if you are unable to forgive a debt of a particular size. This amount will be different for each person, but we all want to be thought generous and not to hold grudges. Mentally framing the transaction as a gift will help you feel better about a future unpaid loan.

What if the person is not close and only reaches out when there is a need? Some people who get a gift from you one time will come back over and over, since you’ve proved your helpfulness. Think of the last charitable contribution you made that was immediately rewarded with a thank you letter and request for more money. When you see repeat requests from the borrower, it could be time to turn off the tap or at least to start demanding greater accountability as you both work to get to the bottom of the root cause.

When saying no, be polite, clear, and firm. You do not have to explain your reasons when asked, as you have the power in this interaction. If the one asking does not respect your “no,” that may shed some light on your actual relationship, perhaps one that should end. If necessary, bring in another person such a supportive family member or even your financial advisor to help bolster your confidence. Finally, you can show a spirit of helpfulness without giving money by directing the person to self-help financial information or a credit counselor.

The friend who is starting a business

Watch out for this one. A casual friend with a new business idea, for example, will radiate enthusiasm and speak with conviction. The eager new entrepreneur will have a perfect elevator pitch for how the product or service is a solution for all kinds of ills, and there may be shiny marketing brochures or a website proving its value. He or she may be attending sales support meetings where the constant positive reinforcement leaves no room for skepticism. In a worst-case scenario, the new opportunity could be some sort of pyramid scheme.

It is common for new business owners to look to the two f’s – friends and family—for initial funding/customers. In fact, there might be a third ‘f’ for fool. You may want to consider why a bank or traditional lender has not provided funding and why you are the answer. In most cases, it’s because a professional lender has seen this before and is not going to be taken in by a slick sales pitch.

It’s important to consider a loan to a small business owner at arm’s length. Many new businesses fail, and it’s in inherently risky to start a new endeavor. If you are not trained in analyzing business prospects or do not want to expend the effort, you may want to decline the request politely and wish much success. Or purchase a product one time to show support (beware of subscriptions and repeat requests) and offer only nonfinancial assistance.

The family member who is drowning in debt

Sometimes a family member can start accumulating debt right under our noses without us noticing until the desperate call comes for help getting out from under high-interest loans. You may not have noticed because this person was working, always had everything they needed, and seemed generally upbeat. Borrowed money will buy you time so you can keep the status quo, but unless you are the government, there will always be a reckoning.

It is your choice whether to help out an indebted family member. But think long and hard about putting yourself in a legal position to pay off the debts (i.e., a co-signer). It is almost always the wrong idea to guarantee another’s debts.

If you make a direct loan, be sure to put it in writing on a formal promissory note and set repayment terms. If there is any collateral, absolutely get some kind of guarantee for repayment (e.g., a deed of trust on real estate). And charge interest. It doesn’t have to be at loan-shark rates, but a zero-interest loan creates a moral hazard for the borrower and may result in slow repayment. In addition, talk with your tax advisor if it’s a large loan that exceeds annual gift amounts (currently around $15,000), because a below-market rate can be considered a gift and require tax filing. Also don’t be afraid to get a credit report, if possible, so you can see what a lender would look at before granting a loan.

The romantic partner with terrible financial habits

Love is blind, and an attractive person with financial problems might count on it. It takes discernment to observe a romantic partner objectively. The hard part about this kind of situation is that you won’t necessarily learn about a bad financial state until much later in the relationship. Perhaps part of what attracted you at first was the other person’s freedom and ability to live with abundance—even if it was really debt-financed. It’s far too easy to ride the wave of positive emotions that can obscure real problems, but they will always surface eventually.

If you reach the place in your relationship where you begin to share finances and major decisions, you might be in for a rude awakening. The other person might begin asking you to pick up a few things or eagerly accept your offer to handle an expense that seems to have blindsided him/her. If this becomes a habit, you might have become a financial savior without even understanding the depth of the issues.

Money issues affect all couples. If you value the relationship but feel pressure around the topic of money, reach out to a couples’ counselor or do some joint reading on the topic of sharing finances. It’s an investment you will be glad you made if it makes your current relationship smoother or gets you out of a bad one.

Commonalities

What do the above examples have in common? For one thing, the person asking you for money recognizes your superior standing. This reflects well on you and in some sense may justify in that person’s mind coming to you for help. The borrower is also relying on a personal relationship to bypass obstacles put up by unrelated lenders. This can be done in good faith, but it can also be a form of manipulation. You should remain vigilant if it proves to be the latter.

You may wish to ask yourself whether you have you signaled your wealth unnecessarily to people in general? We know of one advisory client worth more than $10 million—a collector of expensive sports cars, in fact—who consistently dressed like a slob in public, possibly for this very reason.

When money comes up, it may also be time to consider what kind of relationship you have with this person. Someone who never seems to contact you unless she needs something values what you can give more than a relationship with you.

Above all, weigh the person’s character. Are money troubles a pattern? Is there a drug addiction or other legal situation going on? Has the borrower exercised a disciplined life or been irresponsible? Is this person being very secretive about the need for money, asking you not to tell others?

You don’t want to reward or enable poor behavior in someone you care about. Only by considering all the available information can you make an intelligent decision when a friend or family member comes to you for financial help.

Your Advisor Can Help

If you work with a financial advisor who is a true fiduciary, he or she knows your financial situation intimately and probably has a good sense for your family dynamics as well. You can lean on your advisor for such support as:

  • Serving as a sounding board for your situation
  • Providing a third-party “buffer” between you and the borrower
  • Assessing whether you are in a financial position to loan money
  • Being up to date on interest rates for signature loans
  • Referring you to resources for drafting a promissory note
  • Showing you how to obtain credit reports on a borrower
  • Freeing up money in a tax-smart way

Alpha Fiduciary has significant experience dealing with wealthy families who, like all families, sometimes experience uncomfortable dynamics around money. We are happy to help our clients navigate a request to borrow money, and we can offer a free initial consultation about your financial situation if you need to know where you stand. Just click on the link below:

https://www.alphafiduciary.com/schedule-a-consultation/

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory. Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA). Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.