November 16, 2018

It is wise to recall where many good deeds go

(Flickr photo by NoHoDamon)

I loaned a substantial sum to a relative of mine 10 years ago so he and his wife could have the downpayment for the purchase of their first home. Big mistake.

The loan, plus interest, was due last month. But I won’t see a cent for a long time, if ever.

Although I had been assured all along that funds were being safely invested in bank certificates of deposit and that repayment was guaranteed, it turns out that the couple was counting on a home equity loan for the money. I found that out just a couple of months ago–in an email–and you easily can guess why I can’t count on seeing again my many thousands of dollars.

They have told me that I would receive incremental payments when possible. I’m not counting on it.

For one thing, they casually mentioned that they’ll be vacationing in Europe for a couple of weeks this year, making it less than unlikely that I’ll be getting an increment any time soon.

I bit my tongue at the moment, thinking that no good deed goes unpunished. Someone of my age should have learned that lesson long ago, before the Internet arrived.

My own experience is a prelude to advice you may want to take into account either when lending to or borrowing from family or friends.

Be sure you have a written document; it is a useful way of considering eventualities and minimizing misunderstandings, but the idea of instituting a lawsuit based on it may not be desirable.

You’ll want to iron out what will happen if the borrower misses payments or even becomes bankrupt. And what if your kin or friend is otherwise unable to repay the loan, say, because of death, illness or, in my case, falling property values.

In the event your loan is secured by the property–mine is not–the primary lender, assuming it is a bank, needs to know about the secondary loan. And you as secondary lender need to ascertain whether the bank requires the borrower to escrow the property taxes and insurance so that your security is safe from uninsured harm, liens or foreclosure.

If you are in position to lend money to a buyer or you are a buyer in need of a loan, also do not take lightly how damaging default can be to your relationship.

My relative and I are okay for the time being, but I’m kind of an elephant when it comes to slights, especially when they involve money.

Live and learn, though I seem to have failed with the learning part.

Comments

  1. Ryan Hinricher says:

    Malcom,

    I can relate to this. We do a fair amount of lending within my business. While it would see logical to securitize every deal properly, there are always exceptions. These exceptions carry significant risk and have a high rate of default, usually involving friends/family. It’s certainly difficult to break out the legal documents in these situations.

    I too have been burned on this, but finally ended up getting paid back only because I had a secured interest.

    • Malcolm Carter says:

      Even if I had a secured interest, I can’t imagine that I ever would take legal action. My relative is that close, alas. It’s tough to say ‘yes’ when asked to help and tougher for me to say ‘no.’ I have said ‘no’ with a friend or two but never to a relative. Blood. . . water, etc.

  2. It’s a tough subject. We have all been there where a family member needs financial support and you can actually see the whole thing unraveling in your head as you write the check but you do it anyway. We are torn between our need to make sure that we ourselves are successful if our families are successful and our normal business sensibilities. Brutal. They should pass some sort of law that prohibits family loans. Is that too cynical?