He’s a practical, budget-conscious research analyst in his 50s. The last person I thought would be featured in one of my “stories.” You’d never pick him as a fellow member of the Oooops-I-Screwed-Up-When-I-Loaned-Money-to-a-Relative Club.
Ten years ago, he loaned over $5,000 to his younger sister, Katherine. The deal was that Katherine and her husband Paul would buy a small vacation house in the mountains. The house belonged to Katherine’s late mother-in-law and no one else in the family wanted (or was able) to buy it.
Katherine and Paul could not qualify for a mortgage for this property.
Hey Ken — danger, danger, big red flag, dude!
He agreed to the loan
But he agreed to loan the money to his sister at a modest interest rate. Their agreement, which was never in writing, was that Katherine would pay Ken back “when she could.”
Katherine hasn’t paid back any of the money.
Ken hasn’t had the pleasure of visiting the mountain house.
Over the past decade, Ken never asked his sister about the $5,000 loan. He didn’t even tell anyone else in their family.
He’s never told anyone except me.
In their family, Ken was always the responsible one, and Katherine – well, for some reason their parents always cut her a lot of slack. Ken knows that Katherine borrowed money from Dad a few times and she hasn’t repaid him either.
Was it a loan or a gift?
You might think that Ken would be angry or bitter about this “loan” to his sister, but he isn’t. At the time, he wasn’t exactly thinking of it as a gift, but he calculated that it was an amount he could afford to lose.
Ken told me, “it wasn’t a total surprise … but I was disappointed that she failed to pay back a debt. It’s just not quite right.”
I asked Ken why he loaned the money to Katherine when he knew she wasn’t a good credit risk.
He looked at me intently and quickly answered, “Because she’s my sister. It was an opportunity for her to make a good investment. If I raised the issue, it would push us apart. My relationship with my sister is more important than money.”
Ken made a lot of the classic errors. He loaned to a relative who had bad credit. He didn’t put their agreement in writing. They had no payment schedule. He never followed up when his sister didn’t pay.
However, Ken got one thing right: he agreed to the loan after calculating that if it all went south, he could afford to lose the money.
Ken is never the type to throw money around. But he knew that $5,000 wouldn’t keep him from being able to pay his bills or derail his retirement savings. He also understood that it could only harm his relationship with his sister if he pressured her about the loan.
I’m exaggerating when I say that his attitude was “it’s no big deal.”
If you consider a loan to a family member as a gift that will never be returned to you, you’ll be less disappointed in the long run.
Have you ever loaned money to relatives? Did they pay you back?
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