Neither a Lender or Borrower Be (to Relatives)

(Image from Etsy)

In many families the Bank of Mom and Dad (or Grandma and Grandpa) start as the lenders of last resort.

As the borrowers find out that their monied relatives can often be sweet-talked into loan extensions or even loan forgiveness the BOMAD becomes the lender of first resort.

(Disclosure: your humble blogger luckily does not have this problem in his immediate family but has first-hand knowledge of adult children and grandchildren who never fulfilled promises to repay "loans" for purchases of cars and houses.)

Now technology has stepped into the breach by formalizing and tracking these loans, making it less likely that relationships will be permanently strained. [bold added]

relationship-based loans come with inherent risks, and financial advisers generally recommend avoiding them. Roughly a third of Americans have had a falling-out over money, and the most common reason was because a loan was never paid back, according to a November survey from price-comparison platform Finder.

“Lending money puts your relationship as collateral for the loan, which is risky and can lead to resentment,” said Chris Hostetler, a financial adviser at Hilltop Wealth Advisors in Durham, N.C.

It should also be noted that the presence of "responsible" siblings complicates the situation. Resentments, especially if unequal treatment has been perceived since childhood, often come to a head when the failure to repay the loan is discovered and can poison relationships even after the parents die. Here's how software can reduce the risks of estrangement:

Platforms and apps like Namma, Pigeon and Zirtue have facilitated more than $100 million in loans between friends and family since 2020, offering practical tools and assisting with some tax record-keeping. These three services have reported low default rates, a trend financial advisers attribute to the accountability fostered by close relationships.

These loan apps and services can turn verbal agreements between friends and family into official, written contracts. They also keep track of payments and terms, and assist in adhering to other IRS guidelines, such as establishing a fixed repayment schedule.

There's anecdotal evidence that using these apps increases the likelihood of repayment. Borrowers agree to use them because a) they're in no position to argue and b) the terms are customizable and are almost always better than any bank. However, an app is not a panacea:

Even with the growth of these apps, financial advisers say those lending money should probably consider the money as a gift—if you can afford to go without it.

“If it’s a gift, then getting any money back from them is a treat,” said Tommy Lucas, a financial adviser at Moisand Fitzgerald in Orlando, Fla. “If they can’t get it elsewhere, there’s a good amount of risk that it may not be paid back.”

The old advice holds true: never lend money to a relative or friend unless you're willing to have it never paid back.