Tag Archives: family loans

How Much Money Would It Take To Destroy The Relationship With Your Family?

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Jack Johnson is an NHL defenseman for the Columbus Blue Jackets. Last November (2014) he was forced to file for bankruptcy, making $5 million this year, and having earned over $18 million in his career.

“I picked the wrong people who led me down the wrong path,” and those were his parents. In 2008 he dropped his agent and gave control over his money to his parents. Today, he’s $10 million in debt. The parents took out a reported $15 million in loans at over 24%, a million dollars of renovations on their home, and on and on and on. He’s now cut off all contact with his family. Add Dany Heatley, a Yankee pitcher and many others to that list. But it doesn’t have to be family fraud to destroy your relationships.

Have you ever borrowed or lent more than $500 to a friend or family member? If so, you’re not alone, as more than two-thirds of Canadians have done so, according to a survey by Investors Group a number of years ago.

But did we always want to do it? About a third of us felt pressured to make the loan and ironically, half of us never got paid back! In the It’s Your Money book there is a section on family loans. Simply put: Don’t do it. Yes, there’s pressure and some sense of obligation to help, but it is seldom a good idea. If someone is asking to borrow the money from you, it is reasonable to assume they cannot get the money from a financial institution. If that’s true, that makes them a large credit risk. So should you be the one to take that risk? Is it even fair for the family member or friend to ask you in the first place?

Yes, it puts you in an awkward position, and it may be hard to say no, but do it anyway. I can assure you that there is a very good chance you will not get paid back, or will not get paid back as promised, when promised. Family dinners will never be the same when someone owes you money and has not repaid you. It will cause more problems than the loan attempts to solve, and the person will likely avoid you, and you will get probably get resentful at some point in time. It destroys relationships. I know you don’t believe me, but it’ll happen – I’ve seen it over and over again. Thinking you’re helping makes things worse – much worse.

If you have a hard time saying no, use me: Tell the person your financial counselor won’t let you make personal loans. But you do know they can get a low-interest 11% credit card that would work, or an overdraft on their chequing account.

I guarantee you that whatever the reason for the loan, you are probably enabling someone way more than helping them. But I do know many people will make the loan anyway. It’s not that I’m now going to argue in favour of it, but if you do: Make sure you have it in writing. According to the Investors Survey, 83% of people don’t – and you should. There is a short promissory note you can  use in the back of the It’s Your Money book.

If it is a small amount, get a post dated cheque for the date you will be paid back. It will put the pressure on the other person to make good on the cheque. The alternative is that you will keep waiting for the payment and the other person may never get around to you. When you have a cheque, you can always hold it for an extra week or so, but you have something in your hand.

Take the attitude, either out loud, or in your head, that this is a gift. That makes the amount only what you can afford and you will never ever be disappointed. If you cannot afford to give the money away – don’t do it. On the other hand, a family gift-loan is still a better alternative than the financial straight jacket you would put yourself in should you cosign a loan, instead.

Lending Money to Friends and Relatives

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There’s a reason the subject of lending money to friends and relatives has a big section in the It’s Your Money book. Rough rule of thumb: Don’t do it.

Recently, I had some e mails back and forth with someone who was talking about their credit card balance. One of the first sentences in the note was: I know you hate lending money to family. That was followed by explaining it was the reason their credit card bill was up there. Now, I’m guessing that this wasn’t about a hundred bucks or so – because that’s totally different than a more significant amount.

I don’t actually hate lending money to relatives or friends – and that applies just as much to borrowing it, as lending money. What I hate, and what should never happen, is that broke people shouldn’t lend money to other broke people!

If you can’t take care of your own finances, how can you help others? If you don’t have the money, how on earth can you justify lending it to someone else? THAT was the problem with this person, and THAT is what shouldn’t happen.

Anyone who is financially successful can, and should, use some of their money to help others. Whether it’s tithing, donations to charity, and even helping someone directly who needs the helping hand. If that applies to you, it’s a Christian thing to do, or at least it’ll also make you feel great to know you’ve made a small difference. But it should be done with actual money, and not by someone getting themselves further into debt by borrowing more money.

For the rest of us, we can’t afford to do it – we don’t have the money! Stop thinking of the room left on your credit line, or your credit card as actual real money. Focus on what you owe, and not on what you can still borrow!

It’s perfectly OK to say no and ask if there’s anything else you can help with. It’s also a great idea to go down to Mosaic and spend the $20 buying them a copy of the It’s Your Money book so they can get the tools on borrowing smarter – or better yet – getting out of debt.

Giving someone one car payment doesn’t solve the underlying issue that they likely can’t afford the car – and will just have the same problem next month. Lending someone the money for the rent often just delays the problem for another 30 days. Even worse, is helping someone to pay their credit card or other bill payments. They’re spending money they don’t have. They need to face it to replace it. Stepping in as a temporary stop gap doesn’t get them any closer to their financial reality check.

Yes, I’m being kind of mean. I don’t mean to be, and if you get out of the emotional reasons, you probably know I’m right. If not, I’m OK to get your hate mail, although there certainly are legitimate times for you to step in and to help.

Two more quick points:
This advice applies just as much to co-signing a loan for someone, as lending them money. In fact, more so, because you’re now fully liable for the entire term of the loan. It’s also a really quick way to destroy your credit rating.

Finally, if you do lend someone the money, you have to think of it as a gift and not a loan. If you don’t, it WILL cause problems down the road. The person will start to avoid you, no matter how nice you are about the subject. You may get resentful of how they used the money, or with family, dinners together will never taste the same with the loan balance still hanging over everyone’s head. All of those do more harm than thinking you’re doing something good in the first place.

Feedback on Your Questions

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Over the next two weeks, we’ll answer some of your e mail questions that are certainly topical and questions that thousands of others have, as well:

Your question: I enjoy listening to your program on 1150. We may have a very large amount of money coming in soon. My question is: Do we buy a place and pay off the mortgage completely, or put some of the money elsewhere?

First and foremost, remember that I only ever give feedback on what I would do. But there isn’t a lot to go on here. I assume there aren’t credit card balances, lines of credit, or car loans. If there are, consumer debts are first, paid off from smallest balance to largest.

Then I want you to have a three month of income emergency fund in a simple savings account. That’s not to be touched unless it’s a real emergency.

Next, make sure you have your RRSP, or Tax Free Savings Account, maxed for the year, depending on your tax bracket, etc.

When you ask about buying a place, I’m guessing you mean investment property or your own home. If it’s your place – yes. And you can pay cash for it, which is the dream of 99% of home buyers. Do it! There is nothing like a free and clear house.

If it’s investment property, the hard rule is to have at least 50% down. Then you are in a position of strength, and not risking it all, AND the 50% down means you’ll always be cash flow positive.

Your question: My investment of $30,000 recently expired, and is now sitting in the bank at 1%. We do not want to tie it up again as I am in my late 70s, and want it available if needed. Could you advise us as to what is our best option? We are on a limited budget and this is our savings. We do not have any mortgage and we have a line of credit of $40,000, but it was for a family member, who is also paying it. Our monthly income is approximately $2500.00.

While I’m not an investment advisor, you don’t need one. That $30,000 is almost all of what you have. Take the lousy 1% the bank is paying and know that it’s risk free. Rate = risk, so a higher return means you’ll have to take on more risk. And you’re late middle age, so it’s not worth it.

I don’t like the $40,000 line of credit at all. It’s a floating interest rate, and that’s already hit you for half a percent and climbing. I like it even less that a family member used your credit to borrow. Today they may pay, but what happens when they don’t? And please don’t kid yourself into thinking that won’t happen. Please!

You need to protect yourself first, because nobody else will do it for you. Do two things right away:
-Have a heart to heart talk with this relative and get them to refinance it out of your name or pay it off – NOW.
-Immediately move your $30,000 nest egg to a different bank than the line of credit is at. All the documents you have signed state that they can just take your investments and use it to pay off the debt you owe them – period. Do not risk your entire life savings on a relative. Never, ever. I won’t even talk about the big problem that this relative should never have come to a late 70s person to sign a loan and that you should have said no.

Go to another bank today and transfer the savings. Then have a face to face with your relative that the time to just make interest-only payments is over. Please!

Loans to Family & Friends – Don’t Do It

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Have you ever borrowed or lent more than $500 to a friend or family member? If so, you’re not alone, as more than two-thirds of Canadians have done so, according to a recent survey by Investors Group.

But did we always want to do it? About a third of us felt pressured to make the loan and ironically, half of us who felt pressured never got paid back! With the current state of the economy and tighter credit requirements, loans from family and friends are likely to become more prevalent in the coming year. Is that a good idea, or a financial trap for someone lending the money?

In the It’s Your Money book there is a section on family loans. Simply put: Don’t do it. Yes, there’s pressure and some sense of obligation to help, but it is seldom a good idea. If someone is asking to borrow the money from you, it is reasonable to assume they cannot get the money from a financial institution. If that’s true, that makes them a large credit risk. So should you be the one to take that risk? Is it even fair for the family member or friend to ask you in the first place?

Yes, it puts you in an awkward position, and it may be hard to say no, but do it anyway. I can assure you that there is a very good chance you will not get paid back, or will not get paid back as promised, when promised. Family dinners will never be the same when someone owes you money and has not repaid you. It will cause more problems than the loan attempts to solve, and the person will likely avoid you, and you will get probably get resentful at some point in time.

If you have a hard time saying no, use me: Tell the person your financial counselor won’t let you make personal loans. But you do know they can get a low-interest 11% credit card that would work or an overdraft on their chequing account from their bank. Or alternative four is to give them the name of your loans officer to see.

I guarantee you that whatever the reason for the loan, you are probably enabling someone way more than helping them. But I do know many people will make the loan anyway. It’s not that I’m now going to argue in favour of it, but if you do:
Make sure you have it in writing. According to the Investors Survey, 83% of people don’t and you should. There is a short promissory note you can use in the back of the It’s Your Money book.

If it is a small amount, get a post dated cheque for the date you will be paid back. It will put the pressure on the other person to make good on the cheque. The alternative is that you will keep waiting for the payment and the other person may never get around to you. When you have a cheque, you can always hold it for an extra week or so, but you have something in your hand.

Take the attitude, either out loud, or in your head, that this is a gift. That makes the amount only what you can afford and you will never ever be disappointed. If you cannot afford to give the money away – don’t do it.

On the other hand, a family gift-loan is still a better alternative than the financial straight jacket you would put yourself in should you cosign a loan, instead.