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 Post subject: Being your child's/sibling's banker
PostPosted: Mon May 28, 2007 7:11 am 

Joined: Thu Apr 05, 2007 8:01 am
Posts: 243
Lending money to a relative can be a highly charged emotional action that can have significant consequences and is something most people advise against. However...

If both the lender and the borrower have both demonstrated to be financially responsible individuals, it can be of significant financial benefit to lend/borrow amongst close relatives. I speak from experience. My parents and older sister put up the original cash to purchase the house I'm living in now. A few years ago, my parents bought out my sister's position. I am now in the process of purchasing this property from my parents. We have all figured that this is much better than having me take out a mortgage to purchase my own place. There are several advantages to this approach:

* The $150,000 I would end up paying in interest to some faceless financial institution ends up going to my parents. That's a lot of coin that isn't "lost".
* My parents have significant life savings. So they're interested in having good places to invest their money. The return they earn on this investment is very competitive to what they could get on the open market in other investments.
* When my parents pass away, the money is still in the family. It will end up being split up amongst my brother, sister, and I.
* Increased flexibility on my part. If somehow my world collapses and I end up losing my job, I'm not in immediate critical pressure to keep the mortgage payments going. My parents aren't going to forclose on me. They understand that paying them first is a priority. So when I get back on my feet, resuming my payments to them would be the priority.

One day, assuming my kids have demonstrated fiscal responsibility and restraint, I think I would be quite open to doing the same for them. Again, there are significant conditions to be met before this is possible. The lender needs to have the cash available to lend. Having the lender borrow money to lend to their relative is not what we're talking about here. Secondly, the borrower must be on solid financial footing themselves. Basically, they need to be in the position where getting the loan from the bank wouldn't have been a problem in the first place. They're just using their parent/sibling as their bank instead.

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PostPosted: Mon May 28, 2007 7:42 am 

Joined: Thu Apr 05, 2007 3:05 pm
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I think the key issue there is whether to charge interest.

I borrowed once from "The Bank of Dad" when I was in my early 20s and desperately needed a car. He loaned me the money, but charged me interest at the prevailing rate, which left a bit of a bad taste in my mouth -- he felt I should have a "real world" experience and not be sheltered, but I figured why borrow from him if I couldn't get a better deal than I would elsewhere.

I loan money to my girlfriend whenever she can't pay off her credit card bill, to ensure that she doesn't have to pay interest. I give it to her and she pays me back on whatever schedule she can afford. The only interest I charge is "bisous" (kisses) and that seems fair to me. If I were lending to a family member I personally wouldn't charge interest unless it was a really large amount, and then I'd probably charge a very nominal rate.


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PostPosted: Mon May 28, 2007 8:37 am 

Joined: Thu Apr 05, 2007 8:01 am
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Hi brad,

I'm from a different school of thought from you on this one. Of course, the nature of the relationship will often dictate terms here. I would tend to agree with your dad on this one. I might drop the rate half a percent or so (which is significant on a large loan). I feel that giving too much of a discount here encourages fiscal irresponsibility.

For me, the advantage the lender gains from having somebody that won't foreclose on them (or at least not too quickly) gives a lot of peace of mind.

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PostPosted: Mon May 28, 2007 9:26 am 
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brad wrote:
I figured why borrow from him if I couldn't get a better deal than I would elsewhere.


So why didn't you go elsewhere?

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PostPosted: Mon May 28, 2007 9:42 am 

Joined: Thu Apr 05, 2007 3:05 pm
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nickel wrote:
brad wrote:
I figured why borrow from him if I couldn't get a better deal than I would elsewhere.


So why didn't you go elsewhere?


Because I had no credit history and thus it would have been tough for me to get a loan from a bank. I didn't get a credit card until I was in my mid-30s. So in that sense, sure, he bailed me out of a tough situation and I was grateful, I just thought it would have been nicer if he'd given me a deal on the interest, given that we were family and all. ;-) Back then interest rates were something like 8 or 9 percent.


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PostPosted: Mon May 28, 2007 10:58 am 
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brad wrote:
nickel wrote:
brad wrote:
I figured why borrow from him if I couldn't get a better deal than I would elsewhere.


So why didn't you go elsewhere?


Because I had no credit history and thus it would have been tough for me to get a loan from a bank. I didn't get a credit card until I was in my mid-30s. So in that sense, sure, he bailed me out of a tough situation and I was grateful, I just thought it would have been nicer if he'd given me a deal on the interest, given that we were family and all. ;-) Back then interest rates were something like 8 or 9 percent.


So, technically, he was giving you a deal. Loans for people with no or poor credit have much higher rates.

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Last edited by nickel on Mon May 28, 2007 3:15 pm, edited 1 time in total.

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PostPosted: Mon May 28, 2007 1:38 pm 

Joined: Wed Apr 04, 2007 9:50 pm
Posts: 752
Location: Vancouver, Canada
I've borrowed money from my parents, but I always pay interest. That's because my parents incur an opportunity cost and they aren't really in a position to lose that interest. I pay them a rate that is about the same as what they could get at ING. However, until they declare the interest income, they are not paying any tax on it. If you're in a 40% tax bracket for marginal income, then that untaxed 3.75% is really 6.25%. So there's actually an incentive to lend to me, given that the rate of return is higher. (For the record, I have a stellar credit rating and I value my integrity, so the loan is as good as guaranteed. Besides, if I didn't pay them back, they'd cut it out of my inheritance, I'm sure!)

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PostPosted: Tue May 29, 2007 6:37 am 
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Location: Portland, Oregon
Heh. I should have visited the forums before posting this morning's entry.

Though Kris and I have never been given significant amounts of money from our family (the topic of today's post), we did borrow $5,000 from her grandmother when we moved into our first house. We used the money to purchase furniture. The interest rate was low-normal (can't remember the exact figure), but it didn't matter. We worked to pay her off as soon as possible. We felt added urgency that isn't there when just borrowing money from a bank.


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PostPosted: Tue May 29, 2007 9:02 am 

Joined: Thu Apr 05, 2007 6:27 am
Posts: 106
Location: USA
I've borrowed from/lent to family members before.

The amounts have always been smaller than the IRS gift tax threshold, so we've never been in a situation of having to pay interest. The one time I offered to do so (drew up an amortization schedule and everything), it was summarily rejected.

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PostPosted: Tue May 29, 2007 9:45 am 
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As one of a large-ish family where not all members have always had a very conscientious approach to debt, I would caution that loaning money to one sibling and not to another, even if there are clear and objective reasons, is likely to cause problems.

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PostPosted: Tue May 29, 2007 11:17 am 

Joined: Thu Apr 19, 2007 7:58 am
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I've never seen it done without strings attached. IMO loans or gifts of money to family work in theory, but in practice...


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PostPosted: Tue May 29, 2007 12:58 pm 

Joined: Wed Apr 04, 2007 9:50 pm
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Location: Vancouver, Canada
I insisted on writing up a contract. That way, if my siblings complained, my parents could show them the contract. If something dire happened -- such as the death of my parents -- any inheritance I received would have to be adjusted to pay back the (small) amount of money I owed. I'm probably the most financially comfortable of my siblings, but I wanted to set a precedent. I think most family problems with debt occur when jealousies and missed payments arise.

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PostPosted: Tue May 29, 2007 2:10 pm 
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Joined: Sun Apr 15, 2007 1:45 pm
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Location: New Jersey
My one simple rule for loaning money to friends and family: if I never see any of this money again, will I care? If yes, don't loan the money. It's not worth it.


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PostPosted: Tue May 29, 2007 3:52 pm 
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Location: Up to my eyeballs!
I think most people have a fundamental desire to help family members, which is good. The question is whether providing money is always "help." I know it's a generalization, but I'm not sure this is the best approach.

I have been both a family borrower and a lender (of less than $5,000) in the past. After some reflection, I'd rather help my kids secure a commercial note (and co-sign if necessary) than to loan them money directly. Two reasons: (1) I'm a believer in the system – that is, dealing/contending with real life and its demands. (2) Skills and experience are more valuable in the long run. It's like the old adage: "Give a man a fish, feed him for a day. Teach him to fish, feed him for a lifetime."


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 Post subject: My family and money
PostPosted: Tue May 29, 2007 6:51 pm 

Joined: Mon May 14, 2007 7:20 pm
Posts: 309
I've followed this post closely because I'm in sort of the opposite of the usual situation.

I'm 24 and last year my dad and I took out a loan in my name (for a car, sort of, but not exactly... complicated) because my parents had some difficulties with a business deal and filed chapter 13 when I was in high school (the kind that you pay back much/all of the debt). Actually this worked out surprisingly well for me, as I was eligible for financial aid for college. But that is beside the point. They couldn't get loans, and I have great credit.

He puts the money into my account before it comes out each month, and I monitor it. It was only about 4000. I don't really "approve" of borrowing money to cover expenses, but he asked me to, and I knew that he would pay me back reliably, so I agreed. After working for awhile, I'm now in a position where I could pay off the remainder of the loan and collect the interest (around 9%) for myself. I'm reluctant to do it, because I already find the whole situation too muddled already, and it's one thing if he wants to borrow money at 9%, but I don't think I could stand charging him that.

Of course, I'm increasingly worried about what they have going on for retirement savings, but I don't ask. My mom is quite reasonable with money, but somehow my dad missed out on that trait, and is 50 too late to learn? Probably.

Even more troublesome is the fact that I am a cosigner on probably 10-20k of student loans for my younger sister, who really hasn't proven to be very financially responsible. Of course, my parents say that if she ever doesn't pay them, THEY will (and I know they will, if they are able), but legally, I'm responsible. At the time, I didn't know much about the risks of cosigning (I could spare 3k, but 20k? No.), but even if I had, I don't know if I would have said no. Now she is 22 and I told her to either try my older sister or my parents again, get a credit card and build her own credit, or try getting a job to support herself, because I'm done.

She is currently taking summer classes (rather than working in the summer!!!) and I'm not sure how she financed it. I worry she may have signed my name for me, but I hope she wouldn't do that (these loans have never shown up on my credit report--is that normal?)

Anyway, this is veering far off topic. In the event that someone in my family actually asked me for money directly from me, I probably would help, given that I could truly afford it.


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