Advice for lending money to family/friends?
Question: A younger sibling wants to borrow a couple thousand dollars to put down on a house. He has a lot of debt already (mostly from student loans), and has been working only a couple of years since school. I’d like to see him adopt more frugal principles, but I can appreciate the difficulties of starting out new. I have the money, but I don’t want it to turn into a “gift”. I’m not sure what to do. My business sense tells me not to take the risk, but my brotherly instincts say otherwise. I read the following article at bankrate:
http://www.bankrate.com/brm/news/sav/20000606.as
p The article makes some good points, but I don’t agree with all of it. For example, the woman in the article (Bonnie) asks her ex for a loan to “prove” his friendship, and I don’t think it should cost anything to be a friend. Also, the formal contract sounds like a good idea business-wise, but I think it implies that you do not trust the other person. Those of you that have been in this situation, could you share your wisdom? Thanks.
Answer: I see alot of people saying the sibling can’t handle money and maxes out his credit cards. I didn’t see that in the message at all. He said that his brother has a lot of debt, mostly from student loans. I don’t think a small amount of credit card debt from when you are a student is a sign of poor money management. It’s not the most desirable or frugal way to live, but when you are living as a student, it’s not a sign that you are irresponsible with money either.
I also don’t know if it’s such a bad idea to lend the brother the money. Frankly, buying a house can be the sign of maturity — if the brother is thinking about a tax break and wanting to avoid the money pit that is renting.
This would be what i would do. Tell your brother if he’d like, he can take the money out of one of your credit cards. (Can you do a credit card check that gives you the same rate as purchases?) Make it a credit card with nothing on it and that you will not use. Then, he is solely responsible for making payments and getting it paid off. If he slips up, it will hurt your credit rating, so he needs to be responsible with it. Also, the interest is his responsibility.
WE have done this with 3 different siblings. Two paid the credit card off asap. One didn’t and we paid it off. We talked to him, told him we were disappointed, but that we’d just consider it a gift and then left it at that. He knows he won’t be “borrowing” anymore money from us.
I think making an outright gift isn’t a great idea. It can create an expectation that more gifts will follow.
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