Family Member Loan: Three Reasons I Would Reconsider
This is a guest post from Adam at Money Relationship. At his site, he writes about his journey out of $150,000 in debt.
A little over 12 months ago, my dad approached me about my credit card debt. He wanted to help me get out of it by loaning me money.
The credit card debt totaled about $16,500 and I knew I had a rough patch coming up. I just happened to be graduating in one of the toughest job markets. Needless to say, I accepted the loan and paid off the credit card debt.
Looking back, I’m not sure if I would have made the same decision. Family loans are a tough thing to deal with mentally. One wrong move and a lifelong relationship can be destroyed.
Luckily, my wife and I are very responsible individuals and we want to pay this back in full. Even though the loan has no interest, we have placed it at the top of our debt snowball. It is just eating away at our conscience. So, I thought I would share with you some thoughts on why we wouldn’t do this deal again.
If you are planning on asking someone for a family loan or wanting to loan a family member money, be sure to think extra hard about that decision for these three reasons.
1. Things Aren’t the Same When Visiting
When we visit my dad, things feel more tense. Knowing that we owe him money just makes us more prone to avoid him.
We don’t want to share any information with my dad because we don’t want him to think we are living lavishly (we’re not) while we still owe him money.
Christmas isn’t the same either. My dad typically got us gifts every year. Now, we tell him not to get us anything because we would feel wrong accepting it.
2. Relationships Can Be Ruined
If we decided that we didn’t want to pay my dad back, the relationship we have with him would be strained if not non-existent. Thankfully, that’s not the case with us. However, many individuals borrow money from family and then decide not to pay them back and spend the money on other things.
One story that I read was about a mother who loaned her son $20,000 for a down payment on a house. The mother thought of it as a loan but the son thought of it as free money. Needless to say, their relationship is now at the point where they barely speak to each other.
If you are thinking of loaning money to a person in your family, think again. It’s tough to say no to a family member in need, but sometimes you need to put your own financial interests first. Are you really doing this person a favor or are you endangering the relationship?
3. It’s Stressful
Owing family members money is stressful. Just see the other reasons I mentioned.
It’s also stressful to our finances. Because we feel guilty about this loan, we placed it at the top of our debt snowball. That is hurting our finances because we are basically paying on an interest-free loan while the other debts accrue interest. That’s just adding more to our debt.
You may feel different about family loans than we do. Looking back, we wouldn’t do it again. Looking forward, we will never loan money to a family member. We feel that if you need to help out a family member, just make it a gift and not a loan.
What are your thoughts about family member loans? Would you do it?
Photo by Alvimann
The only time I made a family member loan was when I loaned my dad a couple hundred dollars to buy a farm implement when I first joined the Navy. Dad paid it back with in a few months, as my memory serves, and it was no big deal. But that was a fairly controlled situation. I wouldn’t want to do it again now that I’m a married man. Too much stress with other individuals (wife and kids) in the picture.
Dan Smith´s last blog ..An earie quiet…
Dan – Having a wife and kids certainly adds complexity to the situation. You are probably right to not want to do it again.
I would never give or take a loan from family. It is simply too great of a risk and it’s likely to end in a bad way. Gifts are great, but no loans!
Dustin | Engaged Marriage´s last blog ..Book Review & Giveaway! “Improve Your Marriage” by Russell A. Irving
Ok, I admit it. I’m currently repaying a loan from my parents. No know you guys will shoot me but here’s the reasons why.
1) the credit card I had was at 29.99%
2) I couldn’t get a reduced rate or xfer the balances
3) I’d been working hard to pay down my debt but was having trouble gaining traction.
My parents noticed the problems we were having and offered the help if we wanted it. Trust me, this was NOT and easy choice to make. After 2 weeks of talks, my wife and I decided to take the help. I made sure to pay them 5% interest, I wanted it to be better than the rate they were currently getting on the money.
As far as problems with the relationship goes, we haven’t had any YET. I’ve set up the payment to post to their account on the same day every month. We don’t spend money so I never have to worry about them judging us about our spending. I talk to them about our progress on paying down our debt and this keeps them in the loop and provides a “value” to the money they lended us.
I completely agree that family/friend loans are NOT good. I would not do it again but it has been working out for us at the moment.
Jeff´s last blog ..How to Calculate Net Worth
Jeff – Financial situations like the one you describe above certainly make family loans appear attractive. Of course, it takes a pretty special family to make it work out. Hopefully, yours will go just fine. In general, I think it is better to take the financial hit than to risk a family relationship.
I’ve loaned family members money… and I’m waiting… waiting… waiting. I won’t do it again. It’s ironic that the one child I have to whom I would loan money because she’s so responsible… doesn’t need to borrow any money from me! I know others have worked to repay loans from family members and that’s commendable.
A funny note… when I was married, my husband constantly borrowed money from his mom to get us out of “jams.” She always sent a payment book and we paid her back. At one point I realized we were making fun of her for washing baggies and reusing them. Then it dawned on me… yeah, but she’s the one with the money. I started washing and reusing baggies and I still do!
Christine – Very good story! It illustrates a point that I’ve made before and that is to find someone that is successful in whatever you want to do better and then emulate them. Why reinvent the wheel? I recommend following the path well worn instead!
I’ve been there and bought the T Shirt…I have a family member that owes me right now. It’s not fun. It may end up being a gift before it’s over. You are right about it being stressful. I would not advise anyone to do it.
Ken´s last blog ..experiment
Ken – It is hard to resist helping family. However, as you know, it is a difficult situation to deal with once you are in it.
Did it years ago to help my brother in law and his wife buy the house of their dreams.
I didn’t agree with the house; thought it was too much. But you know what? That wasn’t any of my business (and it’s still not). They’re happy, so I’m happy.
When we lent them the money, I was emotionally prepared to not see it again (which is the only way to go if you’re loaning money to family). We could spare it if we had to.
And you know what? They repaid it before they even moved in! A very happy ending.
Jenn – I’d much rather just give a family member money without any expectation that they will be paying it back. If they do, then great. Of course, you can’t give a gift and then judge because your relative goes and buys a boat instead of repaying you. It can still be a sticky situation if you are not careful.
hi jeff, greetings from perth, western australia.
you make some good points in regards to advising not accepting, nor asking family members, for loans.
there’s even a bigger ‘no-no’: and that is going guarantor for anyone, whether family members or not.
agreeing to go guarantor for someone, is bound to come back to haunt you.
regards,
noel.
Noel – Glad to hear from you in Australia!
Agreed. Only co-sign if you are ready to make the payment yourself without owning the associated asset. Of course, I don’t do debt so I would never co-sign anyway. Hopefully, none of you will either!
My sister and I have loaned between us and we have ALWAYS gotten a loan agreement. We have never had any kind of awkwardness or regrets and it has always been paid off.
I 100% agree with you. Make it a gift, and be absolutely clear if it will be the one and only gift you ever give them in terms of money.
Tiffany´s last blog ..Simple Sunday Recipe: Cranberry Cheese Melt
A gift, are you serious! If you don’t have money and someone else has to give it to you for whatever reason, you are obligated to pay it back. Do you think because it’s your mother or father or any other family member for the matter that you are entitled to the funds that they have worked hard to save? If you’re paying back high interest debt than you already spent the money, you’ve obtained the goods. Now you feel that someone else should pay that back for you? Don’t ask for, or don’t accept money from anyone (family, friends, BANKS, CREDIT CARD COMPANIES, etc.) if you don’t fully intend to pay the money back. Live life in the 500 credit score range, you’ll be humbled and realize the importance of paying back your debt.
According to Merriam-Webster online:
Loan: 1. money lent at interest b : something lent usually for the borrower’s temporary use
Entitlement: 3. belief that one is deserving of or entitled to certain privileges
Either you don’t understand the English language very well or you’re a very selfish person.
– Shocked
Don’t loan family members money, don’t do it.
My wife “loaned” her son a large, large sum of money to purchase a home. He and his wife walked away from the home after they ran the property into the ground. They obviously couldn’t afford it. Now, after one year, she hasn’t seen as much as one dime. What kind of person would do that to their mother. I don’t wish to have anything to do with him or her. Am I wrong?
Robert – I’m really sorry to hear about this situation. It is definitely a tough one. I don’t think you are wrong to be upset. However, I do think you need to forgive because holding on to it will only hurt you and your marriage. I understand this won’t be easy because of the sum of money involved, but it is something you have to do. Forgiving doesn’t mean letting the son off the hook. It just means that you let go of your bitterness about it. Otherwise, this will be a cancer that will cause more trouble. Don’t let it have that kind of power in your life.
You just paid the high tuition the school of life sometimes charges. Chalk it up to experience and go on. Hopefully, your wife has learned a big lesson from it and will not “loan” her son anymore money. I wish you the best!
I have lent money to a family member. While I thought I will get it back, obviously it has been months now. (Sure I got the random phone call saying that I will give you the money), but as much you have seen them so do I.
I really think it is a mistake to loan. (expensive lesson) The thing is that I have to warn the rest of the family as I think they have been scammed too from the same (innocently looking) member.
Suggestions?
Darwin – Obviously, I think loans between family members is a bad idea for the very reason that you are experiencing right now. It is difficult to deal with especially when things don’t go as planned because too many complications are involved. However, once you are in this situation, I think you have to deal with the situation head on. Of course, you have to be diplomatic about it, but still have the conversation. As far as letting other family members know, I think you have to be careful. It depends on their perspective. You might want to feel out the situation with other family members before you go ratting out someone they may feel close to. It could cause you further trouble. Bottom line, you are in a sticky situation with very few really good options.