This week’s Friday Financial Foul Up will feature a guest post by Revanche. Revanche has been blogging at A Gai Shan Life since 2006! Since 2000, she’s put herself through college and paid off $75,000 of debt on her family’s behalf. She has recently hosted the Carnival of Personal Finance and is a huge comic book fan, so of course she is near and dear to my heart. To follow Revanche you can check her on twitter (@revanchegs) or subscribe to her blog. Enjoy her story about loaning money to her family and the repercussions that followed.
If you would like to add your own financial foul up to this series, please contact me here.
When I was a kid, my big brother was my role model and camp guide long before I even knew what those words meant. It wasn’t until I was 9 years old that I realized that this role model was getting me in way more trouble than I’d ever get into on my own sitting in the corner reading books all day. No, this role model took me on one adventure after another. Thrills! Comradery! Getting caught and spanked! Exciting at first, but just painful at the end of the day. And we pretty much always got caught.
As we got older, his scrapes began getting bigger and more costly but it wasn’t until I was 19, and after I had dug deep to pay off a $900 phone bill he had run up, that I realized my brother wasn’t just adventurous: he was careless and it was showing in the bills he’d begun to rack up.
A financial novice myself, it took several more years to understand that his treasured Entrepreneurial Spirit was completely lacking in the Responsibility and Financial Sense departments. The road to that enlightenment, completely with Bailout stops big and small all along the way, cost nearly $40,000 and endless heartache.
A) Four years ago, he was in need of a truck to conduct a delivery business he’d concocted. Because my parents insisted that they would be working side by side with him, and had previously owned and managed their own businesses, I agreed to finance a truck purchase for his use in their business endeavor.
B) Two years ago, the same family members asked me to fund another business venture, the previous one having gone awry in a series of he-said, she-said, disagreements within 12 months.
Where I Fouled Up
A) Having learned from my first car purchase mistake (I guess this is really a trifecta of mistakes section!), I negotiated by phone and fax to get the lowest offer possible from a variety of dealerships within a 60-mile radius. Then I took it to the nearest dealership and walked out paying $5k less than MSRP and a lifetime of free oil changes for 1.9% APR on a 48 month loan. Score! Right? Wrong.
The purchase agreement was based on the fact that I had excellent credit and would qualify for the loan. My brother was *verbally* committed to paying the bill each month but I was the one on record as responsible for the loan. Can you see all the places this could go wrong? I could, but didn’t know how to say no “just” to protect myself, so I proceeded. Almost every month, it was like pulling teeth getting him to make the payment which interrupted my already modest cash flow. After about 24 months of erratic payments, and equally erratic employment on his part, he stopped paying entirely.
B) Having just applied for $20k in 12-month balance transfers during the height of the high interest rates, and just before my sibling defaulted on the truck payments, I agreed to fund the business venture because my parents needed a hand to produce an income. My dad wasn’t able to keep a job that paid more than peanuts and my mom’s health was too poor for her to work regularly. They’d tried so hard, but it was killing them that they were failing. I hated that it required his involvement but there wasn’t anything I could do about that part. Officially the loan was to him.
Again, can you see all the places this could go wrong? Again, I could, but still hadn’t learned how to say no , so I proceeded. He repaid $4000 before defaulting.
Not only was I on the hook for a truck loan that wasn’t a part of my budget, I had to bear the increased insurance costs until I sold the truck almost a year later. On top of that, I was out $16k cash that was due back to the credit card companies within 12 months of the transfer. Hadn’t even earned any money on it, either!
What I Learned
I thought I was assisting my family to make a living for themselves. Instead I became the Family Bank with the worst underwriting practices in the history of loans.
Do Not Cosign Loans: I should have done everything I did for the truck purchase except put my name on the paperwork. Negotiate, haggle, bargain-shop, the lot of it. BUT if 27-year-old me could play the role for 23-year-old me, I’d insist that the purchase either be under his name or not happen at all.
27-year-old me is, admittedly, much stronger and realistic than any of the previous mes.
Do Not Make Loans You Can’t Afford: As for the business loan? I should have nixed that on the spot. I’d already had evidence that they didn’t work well together – and I was just hoping that my sibling was serious enough and mature enough this round. Hope is not the analyses and data-backed business plan we seem to think it is. This decision was made in haste and derailed my original plans for that $20k. I had to work tons of overtime to generate an extra $16k, and sacrifice a number of other goals such as retirement and cash savings for myself.
It wasn’t just the loss of the money that stung, it was that the whole business hurt the family as my parents felt terribly guilty for their part in the loss.
Do Not Let Guilt Make Your Financial Decisions: Most importantly, I learned that you can say No when asked for a favor. Just because they really really want you to help doesn’t mean you should. Making loans to family members is serious business, and while it’s good to help your family, that help should not always be in the form of money. It can, and in many cases will, warp the relationships.
Guilt doesn’t make you breakfast, doesn’t drive you to work, doesn’t earn your money. It should not be allowed to dictate your actions.
Do you like this series? Check Out The Previous Foul Ups:
Foul Up #10 – Brad (Enemy Of Debt) – There’s Nothing Interesting About Interest-Only Loans
Foul Up #9 – Jason (Redeeming Riches) – Buying a Car with a Balloon Payment at the End
Foul Up #8 – David (Money Under 30) – Being Too Eager to “Move Out” and “Move Up”
Foul Up #7 – Matt (Debt Free Adventure) – Upside Down and Paying The Price
Foul Up #6 – Brian (MyNextBuck) – Overdue Books Prevent Me From Renting an Apt
Foul Up #5 – Kelly Whalen (The Centsible Life) – Poorly Planned Vehicle Purchase Costs $24,000
Foul Up #4 – Stephanie (Poorer Than You) – Signed My Life Away at Age 17
Foul Up #3 – Deliver Away Debt – How I Wasted Over $10K and 11 Months
Foul Up #2 – Brian (MyNextBuck) – Quick Fixes to Weight Loss
Foul Up #1 – Brian (MyNextBuck) – How I Didn’t Earn $3000 in Free Money