Author Topic: How to handle family who ask for loans?  (Read 5014 times)

prettymuchfi

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How to handle family who ask for loans?
« on: August 12, 2012, 02:51:50 AM »
I've fortunate enough to be mostly FI, mostly through good luck, though I was headed there by age 35.  Thriftiness taught by my depression-era-child father, and by stumbling into "Your Money or Your Life" early on, set me in the right direction.

The question I have is: Others in my family (and especially my in-laws) often turn to us for money help, and we've generally messed up how we've handled it. Have others had this problem/opportunity and how do you handle it?

Discussion / Details:

Probably because of my father, all the family loans on my side of the family have worked out great. We set them up to split the interest between what I would get in a CD/Savings Account and what they would pay for a mortgage. Never any real tension (except over who was keeping tracking of the paperwork :D), and the first mortgage worked out well enough for all that we're now into a second. Everyone won.

My in-laws, however, are totally different. No money lent has ever been repaid, and when setting up the loan, all talk of interest was met with horror!  (Of course it was only going to be for a short period of time, just to get over the hump). 

Someone else I know has it worse. His partner's family had many kids, and as adults they all turn to them for money. He's sick of it, his partner's loyalty is torn between him and family, and, its all very messy.

As many of you have already guessed I'm sure, the worst is the way the money is spent. So often, after getting the help for "a little bit" (usually multiples of $10k) to "just to get by", a new car appears, or a new kitchen, or similar extravagant purchases that no Mustachian would ever consider for themselves, let alone with someone else's money! Rarely does anyone ask for advice, they just want the money. This is often rationalized as "You were so lucky. Not everyone can be so lucky". Nevermind the completely different lifestyle, priorities and choices being made.

Other info:
 + for the most part, none of these loans will affect my FI, but how they are treated really does affect my "karma"
 + we've gifted generous amounts to family over the years
 + invariably "in-law" loans seem to be the problematic ones, so handling that with your partner is challenging too

One idea is to setup a family loan pool. Make its contents public between the family. Make all loans made out of it public to all in the family. When the pool is empty, it can only be filled up by repaying loans already made. However, how can this avoid becoming a tragedy of the commons? First one to put a straw in the pool sucks it dry and that's it. One would hope the scorn of the rest of the family would fix this? An argument against is "this is very private, even within family" - though personally I say "screw that".

Another is just to never make family loans. Perhaps just gifts, or nothing. Not sure how that would work.

As much as anything else, as others become FI, please be aware of this potential problem. No good deed goes unpunished.

Has anyone else hit this? Do you have any advice? Also, once you're already in the hole with a bad loan, any advice for getting out?

prettymuchfi

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Re: How to handle family who ask for loans?
« Reply #1 on: August 12, 2012, 03:18:52 AM »
Doh. After I thought I had searched the existing articles and forums (for "loans" and variations on that), I of course find this after posting:

http://www.mrmoneymustache.com/forum/ask-a-mustachian/dealing-with-relatives-with-money-problems/

which has a link to:

http://www.mrmoneymustache.com/forum/ask-a-mustachian/parents-and-in-laws-with-money-problems/

Off to digest those ...  Apologies for the repetition!  If I find more links, I'll add them here.

prettymuchfi

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Re: How to handle family who ask for loans?
« Reply #2 on: August 12, 2012, 03:31:25 AM »
Ugh, reading those threads was truly depressing. I thought it was just a problem dealing with the current situations. Throw in aging parents who are still living way beyond their means (funded by a reverse mortgage because they'll "live in this house forever so we'll win, not the banks"), and it gets downright sad.

Anyone have a pile of sand I can stick my head into?

Norman Johnson

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Re: How to handle family who ask for loans?
« Reply #3 on: August 12, 2012, 06:21:11 AM »
My advice is to stop lending out money. It sounds like you know who can handle a loan and who can't if you choose to be the bank of the family.

You could take the bad debt to small claims court, but I personally would just write it off as a (sad) lesson and close my wallet. Also, in my opinion, "a little bit of help" is paying a month of rent or a couple of bags of groceries every now and again. WTF, "multiples of 10K" as help getting by?! Sounds like they are taking advantage of you.

prettymuchfi

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Re: How to handle family who ask for loans?
« Reply #4 on: August 12, 2012, 11:02:07 AM »
 
Quote
Also, in my opinion, "a little bit of help" is paying a month of rent or a couple of bags of groceries every now and again. WTF, "multiples of 10K" as help getting by?! Sounds like they are taking advantage of you.

Agreed.  Fortunately that's not my personal situation.

Quote
It sounds like you know who can handle a loan and who can't if you choose to be the bank of the family.

*Now* I do. Unfortunately that's hindsight, not obvious beforehand. If I'd had some system in advance, then maybe we could still help those who could use it responsibly without getting caught by the abusers.

Another part of the problem, of course, is those that start out well and then start to fade. Not sure how to nip that in the bud early, so that not paying back is never seen as an option.

A learning experience on the ugly side of human nature. Funny how I expect and guard against it in business but not in family. Perhaps that's just my own naivety and others don't have this problem.

wearfannypacks

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Re: How to handle family who ask for loans?
« Reply #5 on: August 12, 2012, 02:03:20 PM »
My husband and I forsee this being a problem with his siblings.  So we set up some ground rules.

We can never loan any money to family that would hurt us financially.
For now, first loans will be no more than 1000.
Terms to pay back the loan are set when send the money.
Once the loan is paid, we are willing to loan more money.
If the loan isn't paid, we treat it as a gift. And no more loans. All other support will be moral.

I don't know how well this will work in real life or if we will tweak our rules. For now I'm optimistic. And I'm glad we could discuss our feelings on it ahead of time.

Note: One financial wreck sister asked the other nearly financial wreck sister for 2k. Never got paid back. I think the sisters realize we are pretty dang financially on top of things, so niether has asked to borrow money from us...yet.

TheDude

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Re: How to handle family who ask for loans?
« Reply #6 on: August 12, 2012, 02:41:22 PM »
The rule in our family is we don't lend money to family. Awhile ago my sister was going through a divorce and she asked for some money. My wife and I agreed to give her some money to help her get by because we felt she was making positive changes in her life.

mm1970

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Re: How to handle family who ask for loans?
« Reply #7 on: August 12, 2012, 06:08:33 PM »
Ugh.  Nobody has ever asked us for money, thank goodness.  But I can foresee it happening.

One sibling lives beyond his means.  My mother is gone now, so the question is - what happens when step-dad goes too and the faucet is off?

Then there's the inlaws.  SIL wants something they can't afford.  It's done, she cannot afford it, she's fine with that.  FIL suggested she ask us for money.  (He suggested this because he's sort of the source of the full issue.)  She said no way.  But I have to wonder if FIL thinks we can be his bank as he gets older.

PaulM12345

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Re: How to handle family who ask for loans?
« Reply #8 on: August 12, 2012, 06:30:02 PM »
This isn't very specific advice, and may have been covered in the other threads, but it's worth asking yourself (or your spouse) whether these loans are helping, or harming, the in-laws. "Helping" them buy a new car is actually harming them. Of course, they might not think so, but what do you think? Do you think these loans are helping them? (and obviously by "help" I don't mean, giving them more things they want).

Sometimes looking at a situation from a different angle like this helps me have a better foundation for the decisions I make, e.g., not supporting other peoples poor decisions.

ShavinItForLater

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Re: How to handle family who ask for loans?
« Reply #9 on: August 12, 2012, 07:15:03 PM »
Don't lend money to family.  If you want to give them a monetary gift, that would be a far better idea, and I would only do that if you are convinced you are not enabling them in bad financial habits--that you are *actually* helping them get to a better future.  Lending to family has too high a probability that you will ruin your family relationships--it's just not worth it, to either lender or borrower.  If your family is going to hate you because you won't lend them money, then there are other issues and you're just exposing them.  Regardless, No Loans to Family is the best policy.