Bottom Line
Loaning money to friends and family (What you keep - Part 18)
We all think that we can make a difference by helping our loved ones out of a quick jam and many times we do. However, most of the time we are only making matters worse.

By Steve Freidell
Land Line contributor


Children, parents, aunts, uncles, grandchildren, grandparents and close friends all can have financial difficulty from time-to-time, and usually they look to a close relative to help "bail them out." Is that normally you? Here are some simple rules for handling various situations.

1. Learn to say no. Bailing out any person more than once is often the No. 1 reason relationships fail. If you don't learn to say no, the person you really want to help is just being provided a free escape hatch every time they make bad decisions. This is particularly true when it involves your grown children or close siblings. We all encounter this problem. Many times providing help is warranted, but continued help isn't help at all. It's just enabling them to make more mistakes.

2. Learn to say no, after you previously said no. People who can't manage their finances properly usually offer reasons or excuses, which will be detrimental to their safety or their children's welfare, such as losing their home, turning off of their utilities, the IRS, etc.

These situations are generally foreseeable. If they have done nothing to circumvent them from happening by now, you are just aiding and abetting their misdeeds. If they haven't gotten the message on the first no, you must be firm with your second.

3. Never loan money. But if you do… The moment you loan money, your relationship with that person changes completely until the loan is repaid. However, if you are in a good financial position, and you feel you absolutely have to loan this person money, have a written document signed by all parties with specific terms of the loan and what the money is to be used for and when it is to be repaid. You can find standardized loan documents online.

When you borrow from most financial institutions, they require collateral or take title to whatever you're borrowing against. You must do the same. If possession or taking title is not possible, take possession of other items of value such as jewelry, artwork, coins, furniture, cars, boats, or anything else that could be quickly sold.

Have a firm repayment date established with absolutely no extensions, or the collateral will be sold. If that repayment time comes and goes with the borrower making incomplete efforts to repay, sell the item immediately.

4. Consider gifting rather than a loan. Most loans between family members never get repaid. So accept that fact and make a one-time only gift to the person in need. Read that again: one-time only. You probably won't see the money anyway, so loaning money to them is in reality digging a hole within their already established crater, which isn't helping them.

If you really want to help them, there might need to be a catch. For instance, in return for the gift, ask the receiver to accept and attend credit counseling sessions.

5. Be a teacher, not a bank. Ever hear of the saying "give a man a fish and you will feed him for a day, but teach the man to fish and you will feed him for a lifetime"? It's the same thing here. You need to help them to help themselves.

Do they have a budget? Can they sell a car or boat and fix their finances? Is there another person in the household that can work another job? Have they sought help from credit counseling? These things and others will help them to truly overcome their problems, not just stick a bandage on them temporarily.

If people fail to find the source of their problems, then how can they ever expect to solve them? Being a good teacher is sometimes much more generous than being a good friend.

Ultimately, be prepared to face the hard feelings that usually follow these situations. Regardless of what you do, you must accept that these people got themselves into their mess and it isn't your responsibility to get them out of trouble.

Be prepared for the resentment you will feel when you loan or give them money only to find out that the money wasn't spent on what you were led to expect. When that new big screen TV shows up, or a new vacation is scheduled, or almost any expenditure is made before you get repaid, understand that it was your fault. You're the one who let them get in and drive off uneducated.LL

This material has been prepared for informational purposes only; it is not intended to provide and should not be relied upon for accounting, legal or tax advice.

Steve Freidell has assisted clients in their cash management, trading, and portfolio management of fixed income securities since 1975. Steve started his career at the First National Bank of Kansas City and later served as first vice president with Commerce Bank, where he served his clients for 25 years. In 2006, he joined the DeWaay organization, the financial management company used by OOIDA. Steve Freidell may be reached at