Last year, my mother asked me for a loan.
“Why is she asking me for a loan?” I asked myself.
“Is she in a difficult financial situation?”
To this day, she hasn’t told me. We live in different countries, and she is not always forthcoming.
It turns out that she wanted the money for a vanity project, to remodel her kitchen.
This was the first time in her life that she asked me for any form of financial assistance, and it was for a vanity project. She caved in to the social pressure that her kitchen must look modern and have the latest kitchen equipment.
For some reason, I was under the impression that if she would ever ask me for any form of financial help, it would be to solve a serious problem, but the replacement of an outdated kitchen? I don’t consider that a serious problem.
Regardless, I lent her the money.
I wish I were rich enough to say, “Here, Mom, it’s a gift. I’ll pay for your kitchen renovation.” But I am not rich yet, so we are still considering it a business loan.
Family members ask for loans for all kind of reasons
Most people need loans because of mismanagement of their own resources.
It doesn’t matter what it is:
- car loans,
- mortgage payments,
- college tuition, etc.
We live in North America, a place full of opportunities. Sure, some people fall through the cracks of capitalism, but most are just lousy at managing their money. They don’t work on self-improvement and complain when a server’s check doesn’t go far enough.
It’s hard to say “no” to a family member
How could I say “no” to my mother? She gave me life, and she paid for every one of my expenses until I was an adult, and after being on my own, she still helped me out some more.
If my mother says, “I need money to do X,” I will do anything within my financial capabilities to say, “No problem, Mom, I will send you the money right away.”
In the case of a brother, cousin, uncle, etc., things are a bit different. You don’t owe them your life, and in many cases, you don’t owe them anything. Regardless, it’s still difficult to say no to a family member. But don’t forget, most people get into financial difficulties due to poor judgment, not to lack of opportunity. If that person who studied Classical literature (or any other liberal art education) can only find a job as a barista, that’s on them, not on those who studied accounting, engineering, or some other well-paid career.
High Cost of Family Loans
Family loans often don’t represent the risk of default. A family member often asks for a loan because other institutions will not lend them money or will not lend them money at a low-interest rate, so they turn to the uncle, brother, sister, etc., to get a loan below market value.
In my case, I lent money to my mother at the rate of 4%, when my average rate of return on my stock market investments is about 8%. I lost out by lending her money.
People are turning to friends and family for loans rather than big banks to avoid spiraling into more debt and defaulting on regular payments. The thing is, they would rather default on a friend or a family member than on a big bank because defaulting on a big bank has real-life consequences, while a family member, while they might not be happy with you, most likely will not take you to court either.
The key to lending money to family members—especially if you expect the money to be repaid—is to treat the deal as a business loan and keep all your emotions out of it.
By treating loans between family and friends as a business transaction, the lender should specify the amount of money, the interest rates, the date the payment is due, penalties for delayed payment, and provisions for non payment.
In my case, my mother is already delinquent on her loan. She has made a partial payment but most of the money is still unpaid. As with all the late payments, there is always a reason for the delay, but the fact of the matter is most family loans will not be paid on time, and the lender will have to accept that’s the reward for trusting a family member or a friend.
Keep Your Expectations Low
When you lend money to a family member or a friend, consider that you might never get your money back. When I lent money to my mother, I was ok with that scenario, if she doesn’t pay me back, she will still be my mother and I will continue loving her just the same. However, my respect for her as a person who can keep her word had gone down a lot.
Expect Slow Re-Payment
The reason people need loans from friends and family is that they typically cannot get a loan anywhere else, the financial institution won’t give them a loan, or if they do, the interest rate will be too high to be helpful.
She stressed that people who borrow from family and friends don’t consider these loans as seriously as they do from banks, so they are far more casual about returning the money. It’s a no-win situation.
My mother is already late with her payment. I believe she will pay me back, but I also believe that if I was a bank, she would not be late with her payment.
With close family and friends you, really cannot demand collateral or interest payments and expect to keep a good relationship.
The Bottom Line
There’s no guarantee a family loan won’t bring disappointment and conflict, but that won’t stop us from helping the people we love the most. If you agree to lend money to your family, be prepared to forgive that loan, it’s the best thing you can do. If you are not ready to say good bye to your money, just say no.