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The Budget Tip of the Day
Wednesday, February 27, 2008
Today's Tip: Close the Family Bank
If you have been to our site before, then you've probably come across the tag line:
Well, money is an awfully sensitive subject for many people. Today, I want to discuss
with you the subject of lending money to friends and family.
Every family seems to have one person who always asks for money. You've heard the sob
story: "…oh please, just help me this once, I just need the money to pay my car loan.
Otherwise they'll impound my car, and if I don't have a car, I won't be able to get to work,
and if I'm not able to get to work…"
The rest of the story is omitted because frankly, you already know how it ends. That
person is always harping on you for money for this reason and that, and it never seems to
end. Not only does it not end, but you never get repaid. You feel stuck, because you really
love this person, but at the same time, how can you say no?
Well, here's the bottom line, and I'm putting it in bold: you are not a bank. So stop acting
like one. And if you were bank, you'd be an awfully bad one because for one, you're not
securing your loan, and for two, you're not properly underwriting your loan. Let me
explain further. A secured loan is any loan that contains a provision that, upon default,
certain pledged property may be claimed by the lender as payment of a debt. In other
words, if they don't pay you, you keep what's theirs. In layman's terms, do you have
something of your family member's that you can take as yours if they fail to pay you the
money back?
The answer to that question is almost always no. I know what you're thinking, so I'll ask
the questions you are thinking. Am I heartless? No. I do understand the circumstances.
Am I practical? Yes.
Let's put it in perspective. Most credit cards are unsecured. In other words, if you fail to
repay the credit card, the company has nothing other than your credit score to damage, as
they cannot take any of your other assets. For assuming this risk, most credit cards charge
an interest rate between 12 – 19%. High risk for the bank, so they price the credit cards
accordingly.
By loaning money to the friend or family member that you know is definitely not going to
pay you back (just using past history here), you are essentially serving as a credit card for
them. But here's the rub: you are not charging any interest. In this case, is it really any
wonder that you don't get repaid? What does your friend or family member have to lose by
not paying you back? Not only will they not pay you back, but then they'll hang the
horrible guilt trip over your head that you should "help them out" because that's what
families do. Honestly, are they even listening to themselves?
The end of our story, as you are undoubtedly aware, is that you don't get repaid, and you
have a rotten relationship with your friend or family member. We already discussed that
you have no collateral on this loan. What we haven't discussed is the underwriting you've
done on the loan. Do you have any idea what their credit score is? Do you have any idea
of their payment history on other accounts? No! What bank in their right mind would
negotiate a loan on these terms with a borrower? Could you imagine walking into your
local bank and saying this...?
Ha! You've gotta be out of your mind!
My advice to you today is to close the family bank. If you are the type of person that has
been burned before, learn from your mistake. You aren't a banker.
And yes, I do have a heart. To prove it, let me propose to you a solution…
If you are in this situation, and you really do want to help out your friend, analyze their
situation. Is this the first time they've come to you for money? Do they have a home? Do
they have anything of value to pledge to you for the loan? What is their credit score?
You laugh (and maybe even scoff!), but this is essential. When you are talking about
money, you are immediately at risk of losing a good friendship. Money is the great divider.
But we can be practical to avoid bad situations. If your friend needs money, then you just
need to do a little due diligence before helping them out.
First and foremost, you should obtain something that is of equal value prior to giving them
the money. Secondly, there should be an interest rate tied to your loan. Yes I did just say
the words "interest rate" and "loan." Hearing the words "What kind of friend are you?"
come out of your friend's mouth at this point might make you analyze that friendship. I'll
tell you one thing, a true friend would indeed help you in time of need. All that I'm
suggesting is that a true friend be a little practical.
If I came to you for food, you would gladly feed me.
If I came to you for drink, you would give me drink.
If I came to you for money, I would respect you if you protected yourself from the
damage to a friendship that our neglect of repayment would do. I value you as a friend.
That's why I've come to you. For you loaning me the money, wouldn't you expect me to
understand that you are taking a risk? If these steps are taken, a friendship can endure the
great test that money provides, and I guarantee you that your friendship will be that much
stronger in the long run.
Please, please understand this principal tenet of budgeting. A budget has no room for these
careless expenses (or in other words, losses).
Have you downloaded the free budget yet? Our free budget spreadsheet is updated for
2008 and features a monthly account tracker and budget form!
If you have been to our site before, then you've probably come across the tag line:
- Talking about finances with friends is like talking about church with friends.
(In other words, you lose more friends that way).
Well, money is an awfully sensitive subject for many people. Today, I want to discuss
with you the subject of lending money to friends and family.
Every family seems to have one person who always asks for money. You've heard the sob
story: "…oh please, just help me this once, I just need the money to pay my car loan.
Otherwise they'll impound my car, and if I don't have a car, I won't be able to get to work,
and if I'm not able to get to work…"
The rest of the story is omitted because frankly, you already know how it ends. That
person is always harping on you for money for this reason and that, and it never seems to
end. Not only does it not end, but you never get repaid. You feel stuck, because you really
love this person, but at the same time, how can you say no?
Well, here's the bottom line, and I'm putting it in bold: you are not a bank. So stop acting
like one. And if you were bank, you'd be an awfully bad one because for one, you're not
securing your loan, and for two, you're not properly underwriting your loan. Let me
explain further. A secured loan is any loan that contains a provision that, upon default,
certain pledged property may be claimed by the lender as payment of a debt. In other
words, if they don't pay you, you keep what's theirs. In layman's terms, do you have
something of your family member's that you can take as yours if they fail to pay you the
money back?
The answer to that question is almost always no. I know what you're thinking, so I'll ask
the questions you are thinking. Am I heartless? No. I do understand the circumstances.
Am I practical? Yes.
Let's put it in perspective. Most credit cards are unsecured. In other words, if you fail to
repay the credit card, the company has nothing other than your credit score to damage, as
they cannot take any of your other assets. For assuming this risk, most credit cards charge
an interest rate between 12 – 19%. High risk for the bank, so they price the credit cards
accordingly.
By loaning money to the friend or family member that you know is definitely not going to
pay you back (just using past history here), you are essentially serving as a credit card for
them. But here's the rub: you are not charging any interest. In this case, is it really any
wonder that you don't get repaid? What does your friend or family member have to lose by
not paying you back? Not only will they not pay you back, but then they'll hang the
horrible guilt trip over your head that you should "help them out" because that's what
families do. Honestly, are they even listening to themselves?
The end of our story, as you are undoubtedly aware, is that you don't get repaid, and you
have a rotten relationship with your friend or family member. We already discussed that
you have no collateral on this loan. What we haven't discussed is the underwriting you've
done on the loan. Do you have any idea what their credit score is? Do you have any idea
of their payment history on other accounts? No! What bank in their right mind would
negotiate a loan on these terms with a borrower? Could you imagine walking into your
local bank and saying this...?
- I have no credit. I won't repay you. I'd like a $10,000 loan at a zero percent
interest rate. Oh, and if you could get that to me by tomorrow, that'd be great.
Ha! You've gotta be out of your mind!
My advice to you today is to close the family bank. If you are the type of person that has
been burned before, learn from your mistake. You aren't a banker.
And yes, I do have a heart. To prove it, let me propose to you a solution…
If you are in this situation, and you really do want to help out your friend, analyze their
situation. Is this the first time they've come to you for money? Do they have a home? Do
they have anything of value to pledge to you for the loan? What is their credit score?
You laugh (and maybe even scoff!), but this is essential. When you are talking about
money, you are immediately at risk of losing a good friendship. Money is the great divider.
But we can be practical to avoid bad situations. If your friend needs money, then you just
need to do a little due diligence before helping them out.
First and foremost, you should obtain something that is of equal value prior to giving them
the money. Secondly, there should be an interest rate tied to your loan. Yes I did just say
the words "interest rate" and "loan." Hearing the words "What kind of friend are you?"
come out of your friend's mouth at this point might make you analyze that friendship. I'll
tell you one thing, a true friend would indeed help you in time of need. All that I'm
suggesting is that a true friend be a little practical.
If I came to you for food, you would gladly feed me.
If I came to you for drink, you would give me drink.
If I came to you for money, I would respect you if you protected yourself from the
damage to a friendship that our neglect of repayment would do. I value you as a friend.
That's why I've come to you. For you loaning me the money, wouldn't you expect me to
understand that you are taking a risk? If these steps are taken, a friendship can endure the
great test that money provides, and I guarantee you that your friendship will be that much
stronger in the long run.
Please, please understand this principal tenet of budgeting. A budget has no room for these
careless expenses (or in other words, losses).
Have you downloaded the free budget yet? Our free budget spreadsheet is updated for
2008 and features a monthly account tracker and budget form!
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