Debt 101: Session 2 – Getting Loans from Family
As I stated yesterday, my wife and I have a total debt amount of $4,394.26. This debt is made up of two separate loans, one from my grandparents, and one from my wife’s father. Yes, our debt is 100% owed to family members. Good or bad, that depends on a lot of variables, but below are some pros and cons you may want to take into consideration before borrowing money from family members.The Good
Most of the times these loans will be interest free
Spread out over a very long time period
This is something that is fantastic to have if you HAVE to get a loan. The longer it is spreadout means the more time you have to put down a solid plan to eliminate it. It also means that there is room to breathe if you need it. Basically this is good for one reason: you have time to pay it off which most likely means low monthly payments (if required).
Are more likely to understand if you can’t make a payment
A majority of the families out there will be sympathetic to other family members who are having a rough time, with or without money. It’s what family is there for. When it comes to having a loan with a family member, they will be much more understanding than a credit card company if you can’t make a payment on a given month due to financial hardship. I am not at all advocating that you take advantage of this and not pay; you should pay something every month, even as low as $1, simply to maintain your integrity.
The Bad
Could create tension between family members
This is a given, even with the most understanding and sypathetic family in the world. The fact is, money muddies the water. It fogs judgement and is simply the root of all evil. If not handled correctly, borrowing money from family could create some major tension that would not be there otherwise. Point below:
Could make certain conversations awkward
Lets use us for an example here. We owe Lindsay’s dad $1,871.51. Say we are over for dinner one evening and her mom asks us the standard question, “so, what’s new?” “well, we just bought a new TV!” I exclaim excitedly. At this point, before hearing how much it costs, dad looks up from his plate, waiting for me to continue digging my hole. “yeah, and we got a great deal on it,” Lindsay adds. “Really,” her mom glances at dad fearing the worst, “how good?” “Well,” I start to play with my food because I just realized how this might look, “it was a great sale. 50% off of the ticket price.” I leave it at that and hope they don’t pry. A few seconds go by and dad has swallowed his food, “What was the original ticket price, son?” I glance at Lindsay hoping she’ll faint or something so I don’t have to say, but nothing happens. “$2,000.00.” my voice squeeks for added affect, of course. I can feel his eyes burning holes in me, but I don’t look up. “Aaron, you paid a thousand bucks for a TV when you owe me nearly two grand? Why wouldn’t you just give me the thousand and knock 50% of your debt?” Not feeling like there was anything left to add to this wonderful dinner and conversation, we left early.
The above scenario has never happened to us, but you can see how it could (if we were stupid, basically).
Tear Your Family Apart
Money is a nasty thing if not used correctly and if not borrowed correctly. If you plan to borrow any amount of money from a family member, talk about the terms of the loan and WRITE A DOCUMENT THAT SPELLS OUT THE TERMS. Have everyone involved in the loan sign, print, and date the document; and make sure that everyone has a hard copy. Keep extras in a fire proof safe, a saftey deposit box, on the moon, and with the President of the United States of America. If anything EVER comes into question about the loan, you want to have that document available so that you can see EXACTLY what was agreed to. Without this document they could tell you that you owed them the money yesterday (but they verbally told you 2 years from yesterday) and they are now suing you for it. This will tear your family apart and then some.
Will I borrow from family again? No. The chance for things to get muddy are too great, and no amount of money is worth dragging a family through the mud. Since I have borrowed from my grandparents and Lindsay’s dad, I have learned so much about money and have developed a set of principles that have guided me to a place where I will not need to borrow from them ever again.
Have you borrowed money from family? If so, tell us about your experience in the comments below.
I concur…I just wish I had a relative that won the powerball so I could’ve got a loan for my college. I guess the government is like my big brother so in a way it’s family…with a nice interest rate. I’ll reserve the family loans for important things in my life such as a ducati or something along those lines. I’m kidding of course although I do really want one within 10 years.
oh, and when I say “big brother” I’m using the term people say when referring to the government. I’m not saying you, Aaron, my real brother, are the one who charges interest.
Good insight into a very sensative subject matter. You have a nice blog here, glad to have found it.