WASHINGTON – Transparency is key when you’re borrowing money.
Once you’ve asked someone to lend you funds, you are obligated – if asked – to give the person a look at your budget. This is the price you pay for seeking financial relief.
The Federal Reserve reported that 40 percent of adults last year said that they could not afford a hypothetical emergency expense of $400.
“Many adults are not well prepared to withstand even small financial disruptions,” the Fed said. “Unexpected expenses, such as a car repair or replacing a broken appliance, can be a hardship for many families without adequate savings.”
When faced with a financial emergency and no money to cover it, many people pile on more debt to a credit card or borrow from friends or family.
Let’s talk about the latter strategy.
I hear often from readers concerned that a sibling is taking advantage of their elderly parents. The adult children watching the loan transactions take place complain that their parents feel obligated to help or guilty if they don’t.
“My 55-year-old sibling has repeatedly asked my parents for emergency loans, mostly to cover bills,” a reader wrote to me recently. “Sometimes they have declined to assist, and sometimes they have helped. Some requests were for smaller amounts, like $2,000, and other times for larger amounts, like $25,000. So far, the loans have been paid back, but some money is still outstanding. What is your opinion on requiring some documentation or transparency on my sibling’s financial affairs when loaning money? One parent says it’s not worth it, especially for the smaller amounts. The other parent hasn’t articulated an opinion. Any other thoughts on guidelines about loaning money like this?”
Having been in the position of being an ATM for various family members, I no longer lend any money to anyone. If the request is justifiable (more on this later) and I can afford it, I just give the person the money. By giving rather than lending, you avoid the possibility of a broken relationship when the broke relative or friend doesn’t pay you back.
But if you do choose to lend money to someone, here are four basic rules to follow:
• “Don’t ask, don’t tell” does not apply. Loans between friends and family can be awkward. The person asking may find it difficult to admit needing a loan. And the family member providing the funds may not want to ask too many questions at the risk of embarrassing the person requesting assistance. So often there is very little exchange of financial information.
But if you’re lending money, you should probe and require proof of need. Treat the request as an actual lender might. The bank would want to view the person’s income, expenses and debt information to determine ability to repay – and so should you.
Is this too invasive?
It is not. And here’s why.
Upon review of bank statements, you may find evidence that your adult child is living above his means, such as eating out a lot. Don’t lend money to people who earn enough to cover their expenses but can’t because of mismanagement. That’s not helping. That’s enabling bad behavior. Why should they enjoy the fruits of your frugality while living it up?
Sometimes people ask for money before exhausting other funding sources, such as trimming unnecessary expenses. If you’re asking for $200, you’d better not still be paying for cable or streaming services.
• Assess the need for money. This is not about being hypercritical of their lifestyle. Just because there’s a request doesn’t mean there’s a need. Perhaps your adult child is underemployed. Maybe your daughter and her husband bought too much house and need to downsize. If your adult child is constantly asking for loans, there’s likely an underlying situation that needs to be addressed. And your handing over money all the time prevents this analysis.
– The loan should come with conditions. If you want to end a habitual cycle of borrowing, require your adult child to take a budgeting class or get credit counseling from a nonprofit agency. If the loan is needed for a bill, you should pay the creditor directly.
By the way, do not lend money you can’t afford to lose.
• Make the loan legit. Get in writing all the loan terms, such as when you expect to be paid back and the consequences if you aren’t.
You may feel uncomfortable treating a personal loan so business-like, but if someone is borrowing money from you, that person – even if it’s your adult child – owes it to you to be transparent.
Michelle Singletary can be contacted at c/o The Washington Post, 1301 K St., N.W., Washington, D.C. 20071, or michelle.singletary@washpost.com.
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