Your Friends Need Money. Do They Have References?

Your Friends Need Money. Do They Have References?

new_york_times:
http://www.nytimes.com/2008/12/25/fashion/25loans.html

By LAURA M. HOLSON
Published: December 24, 2008
AS a financial planner in Carlsbad, Calif., Candace Bahr tells clients to think twice before lending money to friends and family.
Jake Barnhill bought a truck with some personal financing from Josh Berry.
Melissa Pryor, left, is receiving help from Candace Bahr.
But when her manicurist, Melissa Pryor, asked to borrow $3,000 last month, Ms. Bahr couldn’t say no. Ms. Pryor was being evicted because bankers had foreclosed on the house she was renting in nearby Oceanside. Needing the money to hire a lawyer, she turned to Ms. Bahr, a client she had spoken with every other week for a decade though they were not friends socially.
“It was devastating, humbling,” Ms. Pryor said. “To be in that situation, with all the different factors involved, you are helpless.”
Ms. Bahr asked Ms. Pryor to sign a note promising to repay the loan in a year. Despite her professional skepticism, Ms. Bahr recognized that some decisions, even about money, can’t be judged on business alone.
“You can talk about it all day long,” she said, “but on an emotional level we are all still people.”
With the economy spiraling deeper into recession, friends, family and even unlikely acquaintances like the manicurist are increasingly turning to each other with a hand out. More often than not, these exchanges arouse feelings of guilt and worries that if anything goes awry, friendships and family bonds will be frayed.
In the best case, psychologists and financial planners say, giving money to a pal or a sibling in need can strengthen already close bonds. But there is inherent danger, too, that a loan will put an unspoken price tag on friendship. Then the lender feels guilty, no matter the decision, and the borrower chastened for having asked at all.
“The rules of friendship are tacit, unconscious; they are not rational,” said Steven Pinker, a professor of psychology at Harvard University who has studied language, relationships and human nature. “In business, though, you have to think rationally. The question is how do you switch over without feeling like you are keeping track?”
With bank loans harder to get and more Americans losing their jobs, such emotionally fraught transactions are only likely to become more common. Virgin Money USA, which administers loans among friends and family members, said the dollar value of loans outstanding has soared in the last 13 months to $370 million at the end of November from $200 million in October 2007. Credit counseling companies like InCharge Debt Solutions in Orlando, Fla., are seeing a sharp increase of customers interested in borrowing from friends and relatives.
And financial planners say some clients gave thousands of dollars as gifts this holiday season instead of Burberry jackets or big-screen television sets, to thwart relatives from asking for money later.
Few understand the benefits of sharing among friends as well as Elizabeth Dunn, an assistant professor of psychology at the University of British Columbia. She recently published the findings of a study that showed giving — buying a pal a cup of coffee or purchasing the occasional trinket — made people feel good about themselves and their relationships.
But when a friend asked Ms. Dunn if she would lend her several hundred dollars for expenses not long ago, the professor’s warm feelings turned cool. The loan stirred up feelings of guilt; Ms. Dunn wanted to say no. She knew if it was not repaid, it could damage the friendship forever.
“If you really need help and someone helps you, there is gratitude,’” said Ms. Dunn, 31, who ultimately declined to lend her friend the cash. “But at the same time, there is no shortage of stories about how relationships end or crumble over financial disagreements.”
In an effort to avoid such problems, some people making personal loans are using a middleman. In October, Josh Berry, a 32-year-old operations manager at Maxx Productions, an audio and lighting company for large events near Nashville, wanted to sell his 2004 Chevrolet Avalanche to Jason Barnhill, a colleague.
Mr. Berry’s only option was to finance the purchase himself because the buyer’s credit score made it hard to get a $14,000 loan from a bank. At first, Mr. Barnhill refused; a friend had failed to repay a loan several years ago. Mr. Barnhill lost the money and the friendship. “I could never trust him,” he said.
The two men spent afternoons debating different situations, like what would happen if Mr. Barnhill lost his job. Mr. Barnhill didn’t want to be beholden to his friend and Mr. Berry “didn’t want to beat down his door to get the money,” he said. Both agreed that a personal loan was a bad idea if they were to remain friends.
Finally Mr. Berry suggested the two use Virgin Money, the third-party service based in Waltham, Mass., that was started by the entrepreneur Richard Branson, to collect monthly payments from Mr. Barnhill and transfer them to Mr. Berry.
The distance was a comfort. If Mr. Barnhill defaults, the agreement states Mr. Berry gets his truck back. And if Mr. Barnhill can’t pay at all? “It would be them coming after me instead of him coming after me,” Mr. Barnhill said.
Mr. Berry was forced to face his own feelings about which friends were deserving. “I would not loan money to a person who has a low work ethic or simply is not responsible,” he said. “If they haven’t proved themselves in their personal life, I’m not going to extend my hand.”
The shifting power in a relationship — and feelings that ensue — can be particularly uncomfortable among family members who often have convoluted histories. In some cases, an older brother or sister unwittingly steps into the role of surrogate parent, bailing out siblings at the slightest hint of trouble. In other cases, unresolved childhood rivalries take center stage.
“If there is a way to keep money out of the family dynamic it should be considered,” said Charles Lowenhaupt, chief executive of St. Louis-based Lowenhaupt Global Advisors, which works with wealthy families on financial matters. A wealthy client recently approached Mr. Lowenhaupt about what how to handle a situation with a sister who had lost her job and was in jeopardy of losing her home. The brother wanted to help — she was asking for about $400,000 — and he could afford to give it. At the same time, Mr. Lowenhaupt said, “He knew that she’d come back for more.”
What the brother needed was a buffer. The brother told his sister that he would ask his lawyer to help her get a $400,000 loan at a local bank. What the brother did not say was that he would put up the collateral for the loan. The sister ultimately got the loan, saved her house and was none the wiser about her brother’s help.
“It was a screen between him and his sister so they could have Thanksgiving dinner without incident,” Mr. Lowenhaupt said. “The lender didn’t want to feel beholden to the other. And, if it was just a gift, it could affect the self esteem of the person getting it.”
Few people have an army of advisers to cloak their intentions. Instead, financial planners say, truthfulness is the best defense in dealing with friends and relatives, no matter how painful the conversation. “Someone without confidence may avoid the person or plead poverty,” said Myra Salzer, a financial adviser to wealthy individuals who is based in Boulder, Colo.. “That’s not the way to go.”
A wealthy lawyer from San Francisco said she and her husband have helped two family members in recent months. (She spoke anonymously because she did not want to embarrass her relatives.) In one case, the lawyer gave a family member who was going through a bitter divorce a gift of $100,000. In the other, a family member who lost a job was lent $25,000 in recent weeks with the proviso it would be paid back in three to five years.
In both cases, the lawyer laid out for both siblings exactly what was expected of them. And she did not feel compelled to treat them equally even though each knew what the other received. “Quite honestly, the amount was dependent on the degree of closeness I had with each,” she said. “It is difficult not to be judgmental when you see someone in need. We want to blame someone.”
Unlike Ms. Bahr, the financial planner, the lawyer did not ask the family member borrowing $25,000 to sign a note agreeing to repay it. “The person was in such a low state,” she said. “There was no reason to distrust. It would have added insult to injury.”
But that doesn’t mean she wouldn’t feel any less angry if her relative reneged on repayment. “If they are driving a big fancy car and can’t pay me, I’d be mad,” the lawyer said. “But if they are doing what they need to get their life in order and still can’t pay me, I guess that’s O.K. I just don’t want someone to think I have a blank checkbook.”

http://www.nytimes.com/2008/12/25/fashion/25loans.html?_r=1&ref=business&pagewanted=all