Tender, Loving Credit

Tender, Loving Credit

Protect yourself from the stress of lending money to loved ones.

Recently, while pursuing my unscientific study of relationships for this column, I came across a hapless pushover in his 40s whom I’ll call Hank. Hank had a bad habit of making loans to his girlfriends. “So, now,” he says with a weirdly amused sense of persecution, “all my exes owe me money!” He broods over the ethics. “If I broke up with them, do they still owe me? What if they broke up with me?!”

The lost dough would be bad enough, but Hank has discovered that the loans also have made him the butt of a good deal of bitchiness. The exes, it turns out, have a vested interest in being difficult, sometimes even in revising history so that it was Hank who precipitated the break-up, even when it was not, and then punishing him for it. They figure no guy wants to keep bugging an ex who hates him, for cash she doesn’t have. As Hank puts it: “Lending to girlfriends gives them a financial incentive to be bitter and find fault with you.”

Hank’s main problem, of course, is masochism, but he also suffers from a more common disease that frequently accompanies lending money to lovers, friends, or family members: resentment. Personal loans—whether brother lends to sister, a girl to her guy, or stepdad to stepson—come laden with psychology that can be hellish. And when a spouse is involved, it can get worse. Since Hank has finally married, he moans, “Now all my exes owe us!”

The trouble is that these loans start out with lots of heartwarming feeling. Tales of goodwill with unforeseen emotional consequences abound. There’s Blair E., who was moved to help his out-of-work friend save the farm (literally, a farm) and ended up sinking $9,200 into the property. Blair hasn’t seen a penny of it, and though he insists the friendship hasn’t suffered, neither man has mentioned the loan in two years. “I shouldn’t feel guilty about bringing it up,” says Blair, “but I do. I have more net worth than him.”

A successful brother funnels cash to his downtrodden twin, as his wife laments having married the two of them. A mother has to sneak funds to her son for a car because her second husband, his stepfather, has forbidden her to “spoil” the boy. Indeed, roughly eight million households in the United States, according to numbers derived from a Federal Reserve survey, have loans of between $400 and $500,000 outstanding to friends, relatives, and business associates. That’s about $89 billion in jeopardized love and loyalty spread out across the country. And the reality that this happy sharing frequently turns rotten isn’t new. It was as far back as 1600 that Shakespeare wrote his famous warning to the likes of Blair and Hank in Hamlet, Act I: “Neither a borrower nor a lender be;/ For loan oft loses both itself and friend.”

When it comes to offering tender loving credit, financial advisors and gurus love to quote Shakespeare. Don’t Do It is their basic point. “It’s a disaster waiting to happen,” says Sheryl Garrett, a certified financial planner and author of Just Give Me the Answer$. “My father warned me to never ever lend money under any circumstance. His wisdom was excellent.

Advisors such as Garrett have seen irreparable disappointments woven into otherwise happy relationships. “I have a client who lent a significant amount of money to his son,” recounts another planner, Lauren S. Klein, in Newport Beach, California. “The son has remarried very well and has no intention of paying back the dad. My client’s relationship with his son is very strained, because the kid won’t even acknowledge the debt.” Experts can see what ordinary mortals miss; namely, the future. While our fond impulses tell us to trust, and while loved ones’ plights often seem straightforward (“Something went wrong with the car,” Garrett offers as an example, “or, I broke my front tooth”), none of this has much emotional bearing on what’s to come.

Those simple, generous feelings can suddenly disintegrate when, for instance, the beloved debtor buys something indulgent for himself. “If you watch them spend money in a way you don’t condone, the resentment starts,” says Garrett. Add the need for a bit of belt-tightening on your own part, and it gets worse. Ask Hank: “The more I’ve become broke, the more I’ve wanted that money.” How do you maintain closeness with someone when her every bullish moment, her every purchase, fills you with ill will?

So we don’t need no haters, right? Right, but closing down the teller window on our nearest and dearest isn’t a very happy alternative. What’s life if it doesn’t include a little risk in the name of devotion? The experts all seem to have an answer to this conundrum as well. If just-say-no doesn’t satisfy as a rule of thumb, they agree, you can go ahead and play banker, as long as you follow a few hardcore rules.

First, don’t loan. Give. Invariably financial professionals will tell you to think of money shared as a gift, something you don’t plan to get back, just as you don’t expect your ten-year-old to reimburse you for summer camp fees when he’s grown. “I did this myself,” says Garrett,who was named one of the 25 most influential people in the field by Investment Advisor magazine and is a frequent speaker on personal finance. “One of my very best friends in life was in a bind, and I could see there was no way she was going to be able to repay me in the foreseeable future. She said she wanted the money as a loan, but I said, no, it had to be a gift.” Garrett understood that more than bitterness could get in the way. “I knew if my friend couldn’t follow through on a loan, she’d be embarrassed and stay away from me.”

Second, make sure you can truly afford it. “If you have to borrow to give,” says Garrett plainly, “don’t.”

Third, inform your spouse from the get-go, and if you’re giving money to a child, find a way to treat his or her siblings equally. Resentment springs forth gladly from all sorts of sources: Who knew that Suzie, with her nice house and high-powered job, would feel injured when Dad helped her brother?

Fourth, if you can’t make the handout a gift and insist on seeing it as a loan, put the thing in writing. All the professional guides will tell you that this is the most important tenet of lending to friends and family. As Blair E. says emphatically, four years after he stuck his neck out for his farmer friend, “Just document it.” No matter how crass or untrusting it might seem, the experts want you to formalize an agreement. “You can lie and say, ‘I need it for tax purposes,’” says Blair, wishing he’d done so. “You’re not asking too much to ask for a piece of paper.”

To me, this sounds excruciating. You might as well say it straight out: “I love you, baby, but you’re a loser; your future looks iffy.” Or how about, “Darling, I would never leave you—as long as you sign here and don’t miss a payment”? But the point is to separate the emotional ties between individuals—which can exist as beliefs and longings and surges of affection—from the monetary ones, which are expressed as amounts and timetables and quantifiable obligations. They are two different connections that must exist as two separate realities. Writing out an agreement as a promissory note, including dates and interest rates if you want to charge them, will keep those ties from crossing and snarling.

Asheek Advani has created an ingenious system to make these transactions less awkward. His company, founded four years ago, offers a cheap, easy way to take the love out of lending, without being heartless about it. When someone hits you up, you can say, “Sure!” and send them to Circlelending.com. There, a combination of web pages and phone calls with a Circlelending staffer will provide options for structuring the loan. As a third party, the company will establish amounts, interest rates, and most important, a payment plan. It will even make automatic withdrawals and deposits, so that a deduction from the borrower’s bank account—every month, or quarter, or year—gets electronically transferred to the lender’s. “A piece of paper may get you clarity on amount,” says Advani, “but it’s the repayment plan that matters.” Circlelending even tallies up the fees for late payments and works out a new schedule if things go haywire. And the price is sweet: After an initial fee in the hundreds, you—or your borrower—pay nine bucks a month.

In short, mixing money and friendship can be hell, sort of like dating the boss. Which is not to say that it can’t be done. Blair lent each of his two brothers more than $10,000 at different times, with no formal arrangement at all, and he got every bit back. Liz L.,who used the Circlelending solution after years of tension with her indebted dad, rescued both her credit cards and the relationship. Another woman who loaned her poverty-stricken lover a tidy sum, never expecting to see the money again, got a check in the mail a year after their breakup. “It was like found money,” she says happily. “It reminded me what a really great guy he was.”

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Just don’t be a financial fool for love. You may think you’re immune to pettiness, but nobody, as far as I know, has found a vaccine for resentment.