A while back my Sister asked me if she could borrow some money to pay off her credit card debt. Nothing big, just under $2,000 and the credit card even had a decent rate. But with her less-than lucrative career she is having a hard time paying it down. And it was holding her back from buying a new car. Without this debt she should be able to show a good credit score and a positive monthly cash flow – when applying for a loan.
Get some necessary Cash Flows:
In order to loan the money, I needed to know how much she makes and where exactly her money is going every month. When we tracked the necessary spending on Mint, we found out that she was spending a lot more than she original stated.
Now, I responded very harshly and you should never do that – I told her that she wasn’t telling me the truth or hiding additional debt (don’t do that either). My disdain overtones were not very brotherly like or respectful. And it took some very awkward conversations to follow to clear this up.
After some exchanges I learned that much of her months’ expenses where to do one-time moving expenses and other charges. This with her credit card debt compounded the situation. I made some calculations and knew that she could pay off the debt and within a fair amount of time.
Keep it Simple:
Even though I have a Finance degree and could calculate a fair interest rate (something like 6% + LIBOR) for this note. I didn’t want to intimidate my sister on how much it would have cost her if she was to go through a debt consolidation company (also she didn’t have enough debt to qualify). I kept it simple by doing a simple loan installment plan.
I gave her the cash needed to pay off her debt and I wrote a small note to pay me back in 12 installments of principle + interest. If she didn’t pay me a month there would be no penalties and late fees. I would just request two installment payments the next month. By keeping it simple it allowed her to accept the terms very quickly and without much hesitation.
How to Keep it Simple:
- Make sure they can pay you back.
- Have a good rapport with them – see them often.
- Make sure the relative is paying off debt and not going to travel to Europe.
- Don’t be a jerk or pompous about loaning money (everybody takes a loan at least once in their life).
- Don’t have ridiculous payments, fees, structures or penalties.
- Remember you are not trying to make money – but help out a relative.
- Remember you are not trying to lose money.
- Make a loan, if you can afford it – don’t try to impress.
Caution: Loaning Money to Relatives can be tricky
Though we haven’t completed the loan yet, we have done about half of the installments with relative ease. I can see us having no problem in finishing this loan, but there are situations where loaning money to relatives can be frightening. Maybe the relative just lost his/her job or they have an addiction that requires constant funds. Because this loan didn’t entail anything scary like that it is pretty straight forward, and that’s my advice – keep it simple.