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Personal Finance
Loans from loved ones
June 7, 2000: 8:53 a.m. ET

Risks of borrowing money from family or friends may outweigh any rewards
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NEW YORK (CNNfn) - It had been a bad week for Bonnie Russell.

First, she went out to dinner with her boyfriend, who told her he was having problems with his daughter and didn't have time for a relationship.

Then, within days, the Web company owner discovered that she had been "ripped off by a Web guy." She needed $3,000 to pay another Web guy to fix her site, 1st-pick.com. There was no time to go through a bank. She called her ex to see if he would loan it to her.

graphic"I said, 'You want to be friends, here's your chance to prove it,'"she said. "I got the money."

She got it, she said, in part because she insisted that the terms be set down in writing, that it be paid back quickly, and be paid with interest. The agreement said she had six months -- she paid it back in three, she said.

"He did say to me, 'I've never loaned money out and had anyone pay it back,'" recalled Russell, who lives in Del Mar, Calif. "I said, 'You've never loaned money to me.'" But Russell has been on both the lending and receiving end of personal loans and she admits they're fraught with problems. "If you want to lose a friend, loan them money," she said.

Speculating


Credit counselors and financial advisers have pretty much the same story to tell.

"The first byword is that lending to family and friends on a handshake is probably one of the most speculative investments you'll ever make," said Catherine Williams, president of Consumer Credit Counseling of Greater Chicago.

"If you respond to someone for money, you're asking for trouble if you expect that money back," said Dr. Tahira Hira, founder of Iowa State University's Family Financial Counseling Clinic and founding president of the Association for Financial Counseling and Planning Education. "If you think you want this money back, and you expect the money to be returned, when it doesn't come by that time, it's the start of a deterioration."

"If you write it off emotionally in your own mind, then that's a different situation. If the money comes back on time, which will be a miracle, or if it comes back later, you'll be happy," Hira said.

Should you loan a friend or family member money? It all depends. Virtually anyone can find themselves in a situation in which they need a helping hand. Any number of situations -- a job layoff, an extended illness, a divorce, or an unexpected expense like a major car repair -- can lead to a situation in which a friend or family member needs a hand.

Williams and Hira both noted that lenders need to be prepared to deal with borrower behavior that might tax the relationship while the loan is being repaid. It may be an attitude that rubs you the wrong way, or a purchase made when you're still owed money that the borrower has told you he or she can't pay back right now.

"Let's say Susie and Bob show up to the family picnic," Williams said. "He's got a new Coleman stove, he owes you money, and you're doing the slow burn."

No simple formula


"It's a very legitimate and more-used source than we realize, but it should be used to meet a shortfall, not to take the place of someone's responsibility," said Hira. "Before you include a check with your hand of friendship, think long and hard about whether or not you can afford it."

If you are asking for a loan of more than $100, you need to know the answers to at least three key questions:

Why do you need the money?

How do you expect to pay this back?

What are you doing so this doesn't happen again?

If you're the would-be lender, should you ask for a written agreement and charge interest? For short-term loans of less than six months on smaller amounts, it's probably not necessary, Williams said.

"If we're talking about $350 over six months, you're talking about $11 in interest," she said. Now, if it's $10,000, that's a different ballpark."

To Russell's way of thinking, the borrower should offer to sign a legally binding IOU. If they don't offer, ask for one. "If there's even a moment of hesitation, note that," she said.

Hira said a written agreement is important because it helps the borrower understand the value of their request.

Respect


"If you're going to a person in your family, respect what you're asking for," she said. "This is their hard-earned money they've set aside. You should be the one offering to set up a formal agreement. This can be a much more flexible agreement, with enormous savings if you pay it off early because there are no fees. You should say, 'I understand what it means, I will give you a promissory note. I want to do it for myself. Other pressuring things will come along. If I have something formal, I'll respect that.'"

The No. 1 question, though, is how the relationship would be affected if something goes awry, since, as Hira noted, money is loaded with emotion. "If that relationship is important to you, you'll save yourself a lot if you write the money off in your own mind," she said.

"Long term, what's the impact?" Williams said. "Is it worth getting $300 back and having your niece never speak to you, or is it a lesson learned on both parts and you move on?"

Probably the riskiest thing you can do is to either co-sign a loan or borrow money to lend to someone else. "That truly is much worse," Williams said. "That's a real bad idea." Back to top

- by bankrate.com for CNNfn

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.