My friend AJ at the Guppie Life posted recently about a problem he’s having with family and money:

A few months ago, I loaned an older relative some money. At the time I didn’t even think of it as a loan. It was just convenience thing. She had an entirely legitimate bill due, and because of the particulars of the situation, it was just a lot easier for me to foot the bill and have her pay me back.

Unfortunately, now she’s confessed that she isn’t able to pay him back because she’s living paycheck to paycheck…which includes 3 or 4 nights a week at a bar (single), driving SUV, etc. It’s $1000, so not chump change. Especially for someone our age (22-23).

Fortunately, she’s got investments (I don’t know if they’re in retirement accounts) and is going to sell some to pay him back.

Knowing that particulars of this story from chatting with AJ (he lives in DC as well), I can see why he is so surprised by the whole situation. Some people you just don’t lend money to (you either give it or you don’t let them have it at all) because you’re sure they’ll never be able to pay you back. And if they do, it’s a pleasant surprise. But some people you’re quite confident with.

For example, I don’t think I’ll have the money to lend much to my sister, but she’s totally financially responsible. So if her money was tied up in CDs (which I believe the bulk of it is, unless she’s started investing yet…note to sister: get a Roth if you haven’t!) I might be willing to lend her a couple hundred (again, if I had it) with promise of repayment when the next CD’s term ended.

And I’d be shocked in the same way he was if she didn’t pay me back.

But it happens.

As it is, I don’t have enough money lying around to even have the option of lending to friends or family…which makes things a lot less complicated. But someday, I hope to and then I’ll have to figure out my position.

Some ideas for what else AJ could do:

1) Work out a repayment plan with the relative. Offer to help the relative put together a (temporary?) budget so that the money will be there…say $250/month. That means he’d have to wait at least 4 months to get all his money back, but it might feel better for the relative than cashing out investments (especially if they’re in retirement accounts with penalties).

Plus, if the relative stuck to the budget, she might feel less need to borrow in the future (perhaps he could introduce the idea of building an emergency fund).

2) Forgive the loan. I’m not in favor of this, since the relative doesn’t seem to have any genuine need. It also won’t help with the long-term money management issues she’s having. Still, there are various reasons why AJ might be able to frame the loan as a kind of payback for various earlier favors this relative has done him (necessary vagueness is annoying when you’re a writer).

3) Accept the lump sum payback and offer to help her sort her finances out. He thought she had things under control, but apparently she doesn’t. So it would be a nice gift on his part to help her keep out of this situation again.

Sometimes even the most previously trustworthy people let us down and we have to figure out where to go from there. What would you do in this situation?

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{ 23 comments… read them below or add one }

Lori E. May 22, 2008 at 11:41 am

If someone I know genuinely needs money and I have some to spare, then I give it to them without the expectation that it will be paid back. If they do pay me back, it’s a pleasant surprise. I do this way because I’ve learned it’s less stressful for me to not be worrying when they would pay me back.

If I did loan someone money, and they had trouble paying it back, I think your idea of working out a payment plan is the best way. If they are caused hardship by cashing out investments, then it could strain the relationship further.

devil May 22, 2008 at 11:45 am

Good post!

My rule is that I don’t lend money to relatives…I give gifts. Even if they call it a loan, I know it’s probably a gift. Saves my sanity. And I wouldn’t give a gift I couldn’t afford.

Frugal Chick May 22, 2008 at 12:35 pm

I agree with Devil. I’ve been burned many times by relatives not paying me back. So, I now give gifts, not loans and only if it fits my budget.

Frugal Dad May 22, 2008 at 2:07 pm

I agree with your ideas on forgiving the loan after the fact, but this story illustrates why I don’t loan money to relatives. If someone has a genuine need, such as a short term emergency, I simply give the money no strings attached. I also point out that this is the only time I’ll be able to help them as my own supply of emergency savings is not an endless one.

Kelly May 22, 2008 at 2:17 pm

Wow, I’m so surprised by the comments, in a good way! Loaning money to releatives is a very testy topic, and I’m on the site with the other commentors. Don’t loan money to relatives, gift it and consider it a bonus if it comes back.

Keep in mind that this strays into the territory of giving your family financial advice and that is a dangerous place. You can offer someone a life line, but it’s up to them whether they choose to grab on and pull themselves to shore.

donna jean May 22, 2008 at 2:52 pm

I’d also take a gift approach to family – mostly because I know that my family wouldn’t be able to pay me back, no matter how many times they insist they will, something would always come up. Luckily, they know we’re hurting just as much and wouldn’t ask – well maybe they wouldn’t, and they’d understand if we had to turn them down too. I’ve bought plane tickets for family members when they were supposed to pay me back – I didn’t stress over it when it took them 3x as long as it was supposed to. If I couldn’t afford that risk, I wouldn’t do it.

Now, when it comes to friends, well none would ask I’m sure, but if one did and it was someone I knew would pay me back, I’d do it. But I’d also accept that I might not get it back or that it might take longer than they think to get it back – so I better not need the money I loan out and I better mentally classify it as a gift until it eventually returns.

Vered May 22, 2008 at 3:23 pm

You know, I just don’t loan to friends and family. I give. I only give when I think it is absolutely necessary and the right thing to do, and I only give amounts that I can afford to give, so I’ve only done it a few times. But once I do give, I forget about it.

frugal zeitgeist May 22, 2008 at 5:20 pm

If AJ pushes for repayment, s/he might win the battle and lose the war: these things often result in permanently damaged family ties, and that’s generally not worth it.

I’d consider it a gift and chalk it up to experience.

Mrs Micah's Mom May 22, 2008 at 5:37 pm

I once lent a friend money to attend a secretarial course. She was to repay me with 5% interest, but she never did. So I stopped expecting it.

I think you all are wise to give rather than lend.

David Carter May 22, 2008 at 7:36 pm

I don’t think I would lend money to family. I would either give them money or not. If they weren’t financially responsible I would offer to give them tips to finding the money using what they have(which they probably wouldn’t like). If they were responsible I would probably just give them the money and not expect it back. I don’t see anything like that happening in my family though so I am happy. Love and money don’t mix well.

fathersez May 22, 2008 at 11:45 pm

I was raised in a situation where the better off of the siblings helped the lesser off ones.

My eldest brother sacrificed a lot to send me to school and varsity. I did my part for my younger brothers and sister.

I agree that the amounts should be given as a gift then forgotten. (But in this SUV case, I think I would have refused.)

Veteran Military Wife at Life Lessons of a Military Wife May 23, 2008 at 8:28 am

And don’t ever get talked into cosigning a loan either unless you are prepared to pay it back yourself…that’s why the loanee needs a cosigner, ’cause most of the time, they know the person won’t follow through! Be at least as smart as the bank in this case!

Funny about Money May 23, 2008 at 11:59 am

A loan is a business transaction. Heed the old saying: “Never do business with friends or family!”

If you’re going to give money to a relative, GIVE it to her or him.

But one way or another, whether you think of it as a loan or as a gift, proceed with caution. Someone who takes money from a young person just starting out in life and then announces she can’t repay it because she’s living paycheck to paycheck down at the local bar is a person who takes advantage and will continue to take advantage. Just because someone is a relative does not mean you’re required to lay down and let her walk all over you.

A friend allowed her ex-partner to move in “for one month” after said ex- had run herself into the hole (as it develops, because she’d been stealing from a more current ex-partner’s business enterprise…) ended up with this character living rent-free for four or five months, all the while disrupting the generous hostess’s life. Come to find out, the sponge was paying for her daughters’ cell phones to the tune of FIVE HUNDRED BUCKS A MONTH, plus driving a nice car and drinking enough to get herself arrested for DWI. Obviously, she was just taking advantage and could have managed, if no one was there to provide free room and board, to pay the rent on her own place. My friend’s generosity did nothing but postpone the day when this woman had to take some responsibility for her own behavior and her own life. Far from helping her, it delayed her learning to help herself.

Your Sister May 23, 2008 at 1:29 pm

Actually, I don’t believe I make quite enough yearly for a Roth. Once I do, definitely putting some money in there–though CDs is a nice way to keep more short-term savings.

Thanks for the vote of confidence, though! 🙂 I’d loan you money, too, ’cause I know you’re together enough and responsible enough to give it back.

mrsmicah May 23, 2008 at 1:38 pm

@Lil Sis, there’s actually no minimum for a Roth IRA. As long as you earn the money that goes in. Sent you an e-mail to that effect too.

Living Off Dividends & Passive Income May 25, 2008 at 3:22 pm

I’d repo the SUV till i got paid!

A.J. May 26, 2008 at 5:32 pm

Thanks all for the words of wisdom. It’s been a week now, and though the relative promised that the money would be “overnighted,” I still haven’t seen a check.

Pete @ May 29, 2008 at 10:04 am

I agree with some posters – never loan money to family or friends. It will often destroy the relationship!

Merna May 29, 2008 at 12:35 pm

When I loan money to my kids, I take a check in return with the date they promised to pay it back. That way, they know I’m serious about the payback. But most of the time I just consider it a gift and don’t worry about it. Never loan money you can’t afford to live without.

Marci May 29, 2008 at 6:04 pm

I will only loan/gift what I can afford to lose. I do NOT expect to be repaid – therefore, no hard feeling on my part. But,If it is repaid, I will gift to that person again if necessary. If it is not repaid, then that is the end of my ‘loaning’….

All my kids are still in the ‘it’s been repaid phases’ and ‘eligible for another gift/loan. As they ALL make more than dear ol’ mom, they know they shouldn’t ask unless it is really urgent, and that they need to pay it back eventually, and so far, all have.

But there are times when I say – no repayment on this one – it is a true gift, and they appreciate it all the more for it. Just cuz Moms can do that sometimes!

Until Debt Do Us Part September 17, 2008 at 12:46 pm

Good Post. Tough call as to what to do. From an neutral outsider’s point of view it is always easy to give advice and recommend a course of action but to the person who is emotionally involved in the situation then implementing those actions can be a whole different story.

If they can afford it then forgiving debt seems like the most appropriate course of action on the condition that they never come looking for money again and that they don’t come to think of you as a soft touch. Look on the money lost as a lesson learnt i.e. ‘never a borrower or lender be’.

Expensive lesson I know.

g.m. williams July 26, 2010 at 1:34 am

I believe in DISOWNING deadbeat relatives. My motto is that I do not lend money to ANYONE, except my blessed parents because they did so much for me. My other relatives no way-they should work for their money and live on their salaries. If they cannot, they should STARVE TO DEATH.

Dave January 9, 2013 at 5:09 am

I made the big mistake of loaning a 2nd cousin a pile of money to bail her out the last week before her extravagant wedding. She had hit up everybody else in the family, but they all came back with suspicious-sounding / lame excuses for not pitching in. I felt sorry for her with her big puppy dog eyes whining that she would have to cancel the wedding if she couldn’t find a wad of cash to pay the caterer etc. I suggested many alternatives like have friends cater instead of a professional, cutting back in the ludicrously expensive dress, using a justice of the peace instead of a preacher they were flying in from Virginia, etc. I even offered to MC and DJ the gig myself for free. But she refused to even consider alternatives. She’s 40, has 2 kids out of wedlock, lives on her mother’s farm and hasn’t had a real job in a decade. What was I thinking? But I felt sorry for her, so I rallied family members and goaded them into coughing up some fairly serious money, then I matched their contribution with a big bucks contribution of my own and send her money so the wedding could go on.

She PROMISED me (in writing) to re-pay within 30 days. But of course, 30 days after the wedding, nothing came thru. I kindly asked when we could expect re-payment, and she said any day now 2 months. Nothing. More kindness on my part, asking if she needed to work out a payment schedule etc. Nope, the check should be in the mail any day now. 3 months, nothing. She stopped returning phone messages and emails. 4 months, nothing. I got her mom, my cousin, involved, but her mom told me to p*ss off and not involve her. (Hmmmm, see where it comes from?) 5 months, nothing. We offered and offered to work with her to clear the debt, even offering to set up an eBay account and help her sell a few excess items she can afford to live without. Nope, she wasn’t interested, she didn’t want to even consider selling anything. Her husband works under-the-table odd jobs, so they had cash coming in. We offered to let them re-pay at $10/week, just so that SOMETHING was coming our way, a show of good faith and all that. But nope, she kept poormouthing, claiming her 2 kids couldn’t do without the $10/week etc. We even offered to help her look for a job (we have connections with people who would have hired her short term). We even offered to forgive half the loan if she simply worked with us on selling a few items on eBay, stuff she didn’t need. But nope, no matter how we tried to brainstorm with her, she simply wouldn’t work with us. We even asked if she would be willing to just drop spare change into a jar next to her sink, and simply write us a check every month for whatever was in the spare change jar. If it was only a handful of nickels, that’s ok for a start. But nope, she wouldn’t entertain even such a simple offer, claiming that her 2 kids needed spare change for lunch money.

So it’s been a year and we haven’t seen a penny. We never will…. And it’s destroyed the relationship. We send nice emails now, not even mentioning the money, and they’re ignored. They won’t pick up the phone when we call, nor return phone messages. I doubt we’ll ever hear from them again.

So I started checking around with the rest of the family, something I should have done before we loaned them money. As I expected, it turns out that nobody else would loan them money for their wedding because she has a LONG history of stiffing everybody she can, especially family. The pattern is consistent, she’s a polished on artist who sets up ridiculous situations (like her expensive wedding), then comes up with a lame excuse for not being able to pay the bills, then whines to every sucker she can find to “help her out”. But she never has any intention of paying anybody back. I was distant enough that she had not yet hit me up for money, but I had probably long been on her list as an eventual sucker. Which I was….

So she got a hugely expensive wedding courtesy of me and the other relatives I rallied (none of them had been stiffed by her yet, so she got a bunch of us all at once, courtesy of my trusting stupidity…..)

Oh well, mistake made, lesson learned. If a relative comes to me with a legit verifiable emergency, like if their mobile home was carried off by a tornado or whatever, no worries, I’ll be there to help in a heartbeat. But if I offer time and effort instead of money, and if the time/effort offers are rejected, I will think long and hard before opening my wallet….

Relatives. The other white meat!

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