I remember when I was in high school and Friday night rolled around. As most 17-year-olds, I was as broke as an old clock. And, WOW, what $20 could buy in 1985. So like most young kids do, I asked Banco Padres (the parent’s bank) for $20 on a regular basis. And it wasn’t a loan for $20, because if it was then I defaulted on every single one of them.
So when is it time to stop asking family and friends for money? It’s my opinion that you should never, ever ask anyone other than a bank or some other form of official lender for money, ever. Here’s why…
- Most “loans” are paid back under the terms of a promissory note. Borrowing dough from mom and dad is not. It’s paid back under some loose assumption of terms, which often leads to misunderstandings and hurt feelings. And nothing makes Thanksgiving dinner more uncomfortable than the elephant in the room, which is “the guy carving the turkey owes me $10,000.”
- Co-signing is a temptation, which is fraught with peril. Co-signing for a loan or anything for that matter is the financial equivalent of getting married. You are officially connected and getting disconnected, which might seem really attractive, is next to impossible. Lenders love two liable parties instead of just one.
- “He who gets gypped has the memory of an elephant.” Notwithstanding the fact that I’ve now mentioned elephants twice in this article, the quote rings true. I can’t remember who gave me what at my wedding, but I sure can remember the folks who gave us nothing. It’s human tendency to remember these things and nothing is worse than the constant memory of getting ripped off, by a loved one.
- Save the lending to the lenders. Lenders are expected to be cut throats. They’ll report you to the credit bureaus, hire collectors to track you down, and might even sue you for delinquencies. Do you really want to put your loved ones in that position?
Here’s my suggestion, if you are seriously thinking of letting someone borrow money, just let them have it. That way there’s no expectation of getting paid back so there are no hurt feelings when the checks don’t roll in. But even then I’d think twice. You’re enabling irresponsibility by letting someone borrow or have money, plain and simple. True example, a buddy of mine’s father in-law borrowed $100,000 from my buddy’s father. He did this under the guise of saving his home and business. Of course after he renewed his country club membership with a sizable chunk of the money it became quite obvious that he had no intention of handling the money as he had represented.
Let the banks be banks. You be a friend or relative…and neither the two shall (or should) meet.
John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.