What borrowing money from family is really like
Editor's note: The author's family is concerned about privacy, so she refers to her relatives throughout the story as "sibling" and "parent," instead of by name or gender.
One of my siblings recently called and asked if I would approve of sibling borrowing a large chunk of change from one of our parents. The sum is in the six figures and does not begin with the number 1.
Sibling has found a house that is perfect for the family, in the same area where the kids go to school and in a better spot for them to play safely outdoors with their friends.
The arrangement — a loan over 30 years at 3% — would benefit both sides.
Our parent, who is looking for a better return than CDs currently offer, would get more interest than a bank would provide. Sibling would pay less interest than a bank would charge.
If parent doesn't live another 30 years, sibling could take loan forgiveness in lieu of assets when we both inherit. But if sibling defaults, parent's estate would have much less in it — and that would hurt me, my husband, our kid and potentially even generations of people we haven't met.
Borrower payments on a 30-year, $100,000 loan
|Bank lends at 4.5%||$182,406|
|Parent lends at 3%||$151,777|
|Savings from parent loan||$30,629|
This was a lot to think about, and sibling and I spent several hours chewing the situation over. It was clear everyone wants to treat me fairly, and they don't want to proceed with the loan if I feel unhappy about it.
As in every family, dynamics in our clan are not always simple or fair, and the willingness to scrap the deal if it bothered me meant a lot to me emotionally.
Emotions out of the way, we got down to practicalities and talked about the loan's implications.
First of all, there's the question of whether sibling can be trusted to pay back the loan.
I'm going with yes.
Sibling is a stand-up person with a stable life and career. But everyone is mortal, and it's tough to predict how things can change.
We agreed that parent would hold a deed of trust — that's the document that lets you foreclose if the borrower defaults — on the property.
If sibling didn't borrow the money from parent, parent would likely use that money to buy rental real estate.
Parent would have income from that property now, and we would likely inherit a property that had increased in value. If parent loans sibling the money instead, then parent gets the income, but just sibling ends up with an appreciated property.
On the other hand, if parent bought a rental property, then parent would also have to pay out for taxes, maintenance, repairs, insurance, assessments and so forth, which would reduce the property's overall value to the estate. If sibling borrows the money, sibling also will be in charge of those expenses.
We decided this one is probably a wash, particularly as we can't predict how much a given property will appreciate, nor how much repair and maintenance it will need.
In a perfectly fair world, sibling and I would both want to buy property, parent would loan each of us the same sum, and we'd both make our choices and take our chances with expenses and appreciation.
But I'm not in the market.
I bought an investment property last fall, and I would ultimately like to buy another, but not right now.
I could ask parent for a loan later on, but there is no guarantee that parent will still have money to lend me.
Like many older people, parent worries about running out of money. That's not an unreasonable fear, given that members of our family tend to lead long lives.
Moreover, I've always found that it's good to be independent, much though I love my kin.
In a loan between individuals, especially in families, the lender sometimes feels that it's OK to express opinions — you're going to paint the place that color? — that wouldn't get mentioned if the loan didn't exist.
For me, avoiding that situation saves a lot of stress.
In the end, my family concluded that fair doesn't necessarily mean equal.
When we were children, it was an easy matter to give each sibling the same amount of ice cream. As adults, we have different priorities, and our lives are no longer on the same schedule.
Sibling will take the loan, with my blessing.