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Happy Father’s Day! Louise from Our Odyssey dropped a line the other day to share a story of how her father taught her about debt.
When I was fresh out of college in June of 1985, my Dad gave me $500 to buy furniture and as an apartment rental deposit. This was an interest-free loan and we were both lax about setting up a payment schedule. Nothing was in writing. He said, “Pay me something monthly.” I paid him about $50 for two months, then skipped a few months and forgot about it. In December, he decided to forgive the rest of the loan as my Christmas present. Wow, $400! I thought I was getting a great deal. Of course, the money was already gone, but still, I was happy.
About a year later, with a good job but not a frugal lifestyle, I had no savings but wanted to buy a small condominium to live in. At that time, a one-bedroom condo in the San Francisco Bay Area cost about $80,000. I would need about $8,000 as a down payment. I asked my Dad if I could borrow the eight grand from him. He laughed out loud and said, “You missed 4 payments on a $500 loan and now you want to borrow over 10 times that amount? Sorry, no. You’re a lousy credit risk.” I was shocked! I couldn’t deny the truth of it, though, and so I didn’t buy a condo.
I vowed that no one else would ever call me a “lousy credit risk.” My Dad still loved me, but banks would not be so forgiving.
Three years later, that condo was worth $160,000 and I had spent close to $25,000 in rent (approx. $700 per month for a one-bedroom apartment). That $400 Christmas gift cost me over $100,000. Ouch!
My new husband and I again approached my Dad to borrow money for a down payment. But this time we were armed with our (good) credit reports from Equifax, bank statements, and a written promissory note with fair market interest rate and loan payment schedule. My Dad willingly loaned us the cash, we paid him off in three years (every month, never a late payment), and I’ve been a home owner ever since.
I am eternally grateful that I learned this hard lesson early and from someone who cares about me. Thanks, Dad!
Great story. If you’ve got some time, Louise’s blog is a great read. Our Odyssey tells the story of how she and her husband retired, bought a bus to call home, and began a nomadic existence. Learn all about this experiment in their FAQ.
This article is about Debt, Real-Life, Travel Sunday, 17th June 2007 (by J.D. Roth)
June 17th, 2007 at 7:47 am
I think the lesson that I would take here is not to borrow from people without an agreed way of paying it back - it could rebound on you in ways that you don’t expect.
June 17th, 2007 at 8:56 am
Wow, a one-bedroom condo in the SF Bay Area for only $80,000 (back in ‘85)!! Those were the days.
June 17th, 2007 at 8:58 am
I often comment from a parent’s perspective, which is less common on blogs since the crowd is young. Good parenting sets the child up for success, not failure. If the father did indeed expect to be repaid, he should have been clear about that, and what the consequences were if it was not repaid. To “forgive” the loan but refuse future help is a mixed message. This is very common in families, where parents are often conflicted between gifting and loaning, and kids pick up on the discomfort.
Don’t give up on interfamily loans, though! Just make sure the communication is clear, the expectations expressed, and the goals articulated. Then use a website service to manage the payments. Note that if the interest rate is below market value (one would hope it would be!) that there can be tax consequences. I wrote about this:
http://moneychangesthings.blogspot.com/2007/04/baby-boomer-national-bank-merges-with.html
June 17th, 2007 at 9:58 am
Loans to family or friends are very tough since theres a slight conflict of interest and a relationship at stake. Some people take advantage of that relationship. But wow, a $400 loan cost them over $100,000 I’d be so mad! lol. Well, its a lesson learned. Its like having bad credit and a great property becomes available under valued but you can’t pull the trigger. So at the end her father was teaching a valuable lesson.
June 17th, 2007 at 10:30 am
It was a good basic lesson for the dad to teach his daughter. They should have probably borrowed from a bank for the house instead of her dad to build credit. The extra interest cost might hurt initially but it would be worth it in the long run as their credit score would have improved (this of course taking into account no delinquent payments on their part) . I would have probably gone the dad route myself except my parents severed that cord a long time ago.
J
Money, Dreams and the Harvard MBA
http://www.roadtoharvard.com
June 17th, 2007 at 4:41 pm
It would be nice if everyone had parents who taught them valuable financial lessons. Many parents are poor role models when it comes to handling money. They either support their kids into adulthood, or they themselves live paycheck-to-paycheck until they retire with no savings. I’m amazed by the stories I hear of adult children supporting their elderly parents, who insist on maxxing out their credit cards and using money gifts that are meant for food for flatscreen TVs instead. Be thankful if you were lucky enough to have parents who took their responsibility seriously and taught you some hard lessons early on. And consider being one of those parents to YOUR children.
June 17th, 2007 at 4:43 pm
I’ve learned in my dealings with family - and with my family’s dealings with each other - better not to loan money to family at all. In my situation, my brother loaned me money and we didn’t talk about a repayment schedule. He decided to come down on me heavy when I was out of work, and in a bad mental/ physical state and couldn’t pay. He was right,in that I did need to pay him back, but he was being a bit of an arse in expecting me to pay him back immediately. My gut told me not to accept the money when he offered it, and I wish I would have stuck with it. But alas, you live you learn.
June 18th, 2007 at 6:18 am
I think the lesson that this father taught her daughter was very valuable even if it meant that she missed out on a great opportunity on that condo.
June 18th, 2007 at 6:35 am
[...] from yesterday and you will find them below. A reader shares a story with Get Rich Slowly titled What My Father Taught Me About Debt. I think the lesson that this father taught her daughter was very valuable. A very good [...]
June 18th, 2007 at 3:39 pm
Nice story, my dad would never lend me money though. He’s cheap as all heck and never taught me anything about finances except that I should hoard money for myself.
June 19th, 2007 at 7:28 am
Good story but I wish she left out the line about $400 cost me $100,000. What is the point of that? How much was that $160,000 condo in 1992, after the real estate crash? And they ended up buying in 88/89 right at the peak? Good story about building a credit score and being responsible. Bad story about trying to time the real estate market.
August 24th, 2008 at 12:34 am
As a ten year old, I would ride my bike to the modest barber shop that served our Chicago suburb. After getting my hair cut one brisk fall afternoon, I was mortified to discover that I hadn’t brought the necessary $.65 that my mother had given me. Noting my dismay the barber kindly explained the necessary financial procedure. “That’s OK sonny. On this piece of paper write ‘I.O.U 65 cents’ and then sign your name”. After I carefully did so he said “Now put it in the pocket.” “What Pocket?” I asked. “The pocket of your coat which will be hanging on that wall until you get back here with my 65 cents”. Thus I learned about both debt and collateral.