We Loan Money to Family
Here’s the Deal
We are loaning my brother $3,000. I can hear all the financial bloggers screaming at their screens this very second “No, don’t do it!” “Never lend money to family!” “That’s a bad, bad idea.” And I suppose for some people, that is true. It’s never been true in my family.
Let’s start with the fact that Charles and I would not be where we are today if family had not been willing to lend us money. When we first moved to Seattle, with no jobs lines up, it didn’t take long for our savings to run out. We had jobs lines up, but a simple thing like the windshield wiper motor going out was beyond what we could handle. And in Seattle, in the fall, that’s kind of a necessary thing.
When we bought our first house, my mother loaned us some money so that we could pay for our carpet upgrades. She ended up gifting us that money as a wedding present, but we had fully planned to pay it back.
It’s also important to note that while I have no doubt my brother will pay us back, we could afford to be out that money. That’s part of why we chose that sum.
And, in my family, just because someone asks to borrow money, it doesn’t mean you are obligated to say yes. My brother asked, fully expecting me to say no. He did not ask for a set amount, just whatever- I think that $3k was also more than he was expecting.
Why We’re Doing It
I wrote last week about the fact that my brother’s business partner has turned out not to like being a business owner. He wants to be a boss, but not actually responsible for getting the work done. It is best for the business to buy him out as soon as possible. There is no point in having a partner who does not want to be involved.
My brother could put the majority of the buyout on a credit card, but at 10% interest, well, any little bit that could come from family helps.
And while I have faith in my brother and think he his chances of making a success at this business are pretty high, we’re not at a point where we want to be silent partners, so it’s a loan.
My One Requirement
I did put one stipulation on making the loan. I asked my brother to send me the books. Not because I was going to make my decision based on what they said, but because if he wants to go forward in business, in the future he’s going to have to get used to presenting his financial statements to professional lenders.
It was something he needed to do anyway, so me asking for it just meant it got done sooner- that he had a clearer picture of what the guest house’s financial status actually is.
The Pay Off Plan
My brother expects to pay us back in 6 months or less. Doing the books on the guest house, he actually thinks it might be able to pay us off in 3 months or less. We’re actually asking him not to do that. While paying off the credit card first would be better, he’s counting that as a business expense. But what we want him to do is take half of what he would pay us and put it in savings, creating a financial reserve of $3,000 at the same time he’s paying us back. Will $3k go super far if something goes really bad? Maybe not, but we all know that having any kind of emergency fund is a lot better than not having one at all.
So yes, we loaned my brother $3,000. And it’s no big deal.
I fully agree with you on this one – families should stick together. With one amendment: you will have to be prepared in your heart to 'wave' this loan; not because you brother is not going to pay you back – he probably will. This is 'just in case' – whenever I do something like that I remind myself that people are more important than money; and if 'my people' hit hard times they stay and the money considerations go.
And that's why I mentioned that $3k was an amount we could afford to lose. I fully expect my brother to pay us back, but if something happens and he can't, then he can't. And no one's mad.
When it comes down to it, only we know what is truly best for our families and personal situation. That's why I don't preach. Personal finance is personal – that's what makes it so much fun!
That's true. I know people for whom loaning money to their families isn't a good idea. I know that I am lucky to have a family where it isn't an issue, and also to have the money to loan.
You have to look at and evaluate each situation, and I think you've done that very adequately. If you're comfortable after that, who else is to say anything? It sounds like you'll have no issues getting the money back and I wish the best to your brother.
Whenever I hear people talking about blanket rules, like never lend money to family, my first thought is always- how sad that you have a family where that has to be a blanket rule.
And no, I don't think we'll have any trouble getting it back, because paying us back in important to my brother.
honestly, if his books looked good, I might have tried to buy in as a passive investor. I feel like few people ever think outside of the stock market mindset. However, if you have the extra money and an entrepreneur you trust, you can earn a good return on investing in others.
Personally, I have some family members who I'd lend to and others I wouldn't. For me, it depends on who the person is.
At another time in our lives, we probably would ask if my brother was willing to have us invest (but I wouldn't force it). However, given everything we have going on, investing at this time isn't right for us. But if, in a few years, my brother looks at opening a second location and needs money, we would probably consider it.
Sounds like you've worked through it. I do think many people would have trouble truly forgiving the loan and not treating the family member a little differently if they didn't get paid back. Just human nature.
That's why C and I discuss exactly what we can afford to loan. It won't ever be an amount we couldn't live without, without an issue. Makes it much easier to put the relationship ahead of the money.