“The Tim” is in a bind. He'd like to help his brother-in-law out of a tight spot, but he's not interested in loaning him money. What are his options? Here's his story:
My brother-in-law is currently in his third year of college at a private university. He is paying for his schooling without any financial assistance from his parents, as they had somewhat of a falling-out a few years ago. Recently, his job came to an end (I don't know if he quit, or if it was just a limited-time job), and he is now rapidly running out of money. I don't know how many places he's applied when looking for new work, just that he hasn't found a new job.
He has asked my wife and me to co-sign a loan for $10,000, which he would (allegedly) use to pay off his car (he owes $1-2k on it I think), rent, tuition, and food until he finds another job.
There's pretty much no way I'm going to agree to co-sign any kind of loan, especially not one for that much more than he really needs. I'm also not keen on the idea of just loaning him money directly (which I would essentially treat as money I'd never see again).
So my wife and I are trying to think up things we can do that are not facilitating poor financial habits, but also not completely ignoring a family member in need. I would like to solicit advice from you, the GRS community. If you want more details about the situation, feel free to ask. I'm sure there's probably some pertinent info that I'm leaving out.
Here's the conventional wisdom on loaning money to family and friends: DON'T DO IT. These sorts of transactions have the potential to create resentment from all parties — it's best to leave them alone. However:
- If you insist on loaning money to somebody close to you, do so with the expectation that you'll never see it again. Only loan money that you can afford to lose. Charge a fair interest rate. Set up a payment arrangement, and get the agreement in writing. Or offer the money as a gift.
- If you insist on borrowing money from someone close to you, fulfill your end of the bargain. Make your payments in full and on time.
Whatever you do — whether you loan money to a friend, or help them in some other way — please don't jeopardize your own financial well-being in the process.
I have a good friend who repeatedly loaned money to his former girlfriend. He basically subsidized her entire life, even after they'd been split up for years. He did so without the expectation of repayment. But eventually he lost his job and had no savings — he'd loaned all his money to his ex-girlfriend. He was forced to move out of his apartment and find someplace cheaper. Since then, he has been unable to pay for a much-needed operation. And still he loans money to this woman!!! I try not to be judgmental, but in this case it's difficult. Because my friend refuses to say “no”, his financial life has been ruined, too.
If a friend asks to borrow money and you're uncomfortable loaning it to her, it's important to be honest. Don't be mean. Be straightforward. Explain to her why you can't, or won't, make the loan. Saying “no” may cause some temporary awkwardness. But it's nothing compared to what might happen if a loan were to go sour. If you're uncomfortable loaning money to a friend, be up front about it.
If you do so say “no”, look for other ways to help. If the borrower needs money to pay off debt, offer to help with credit counseling. Give them the best advice you can offer. Help them find a job or an apartment. I think The Tim has the right attitude here — he's not looking for a way to give money to his brother-in-law, but a way to help him without becoming an enabler.
Have you loaned money to family or friends? Have you been on the receiving end? What was it like? Would you do it again? More to the point — and to directly answer The Tim's question — what alternatives are there to offering a loan? How do you help a friend in need without actually giving them money?
Here are some other discussions of this subject:
- Liz Pulliam Weston has a good article that discusses the right way to loan money to family members.
- Mary Rowland at MSN Money explains why you should never co-sign a loan.
- Ask Metafilter: What do you do when a sibling ask you to bail them out of a financial problem?
- Ask Metafilter: How much money should I loan a very good friend of mine in a tough situation?
- Ask Metafilter: How do I lend someone money?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.