With times getting tougher and the holiday bills about to
come pouring in, those of us who are better-heeled may be more pressed and more
tempted than usual to help out loved ones with money troubles. I talk about ways to help
with … and more often, without money … when the problems are over-spending,
financial infidelity, poor budgeting, not enough income, student loans, and
credit card bills in “How
to Deal with Family Debts,” which was recently posted on Credit.com,. (I hope you’ll check it out, and let us know what you think!)
When it comes to lending money, unless you can truly afford
to never get the money back, I advise you not to lend it. There’s too much risk
of family strife. That same advice holds true for borrowing. Don’t take out
a loan for someone else unless you are prepared to make the payments.
I just came across a good example of how quickly things can
go wrong when you borrow for someone else. It’s in the current issue an ezine I
recommend to all: The
Dollar Stretcher. Donna, a reader, took out a six-year car loan for her
son. After four months, Junior can no longer afford the payments, and
Donna, who has her own car payments to worry about, can’t afford them either.
Her question is, “How do I get out of the loan?”
Gary Foreman, Dollar Stretcher’s editor, who advises
against taking out a car loan for a child, calls this “a financial accident
waiting to happen.” I agree. As he points out, Donna doesn’t have great options at this point. She
might be best off finding someone to take over the loan in exchange for the
car. But a car that’s four months old won’t be attractive to new car buyers,
and used car buyers want more of a bargain.
Donna could go for a voluntary repossession, giving the car
to the lender to sell. She’d have to come up with the difference between the
loan’s balance and the amount the lender gets for the car. “She can expect that
to be about 25% of the purchase price of the car,” explains Gary, a former
financial planner. “If she doesn’t have the money and can’t work out a payment
plan, she’ll face a damaged credit score and perhaps even bankruptcy.”
Maybe Donna would have better luck selling her car.
If she could pay off that loan, she’d just have one car and loan to worry
about. “Granted, it’s not the car she wanted and would commit her for nearly
six years, but it does have the advantage of protecting her credit score … .”
Gary thinks her best option is: “Tell Junior
to suck it up and act like an adult. He obviously wanted this car. He agreed to
make payments to Mom for the next six years so that he could get it. Now it’s
time to live up to his promise. To do anything else would be irresponsible.”
Junior will probably need to change his lifestyle and get a
job or two. While that will be painful for him, Gary believes that if Donna
lets him off the hook, he’ll soon have other debt problems. “In a way, Donna is
faced with an opportunity,” according to Gary. “She can help her son become a
responsible adult by expecting him to live up to his commitments.”
I agree that Donna is faced with an opportunity, but I’m
inclined to look at the situation a little differently. Junior’s not the only
one who made a mistake. Donna chose to sign for a loan that she should have
known her son couldn’t afford. To me, it’s not very different from the subprime
mortgage mess, where bank let people take on more debt than they could handle.
Both parties are at fault.
So my advice to Donna would be less “tough love” for Junior
and more “we’re in this together.” Sure sounds like the whole family might
benefit from some money management advice. A quick phone call to 211 or a quick
click should
tell them where to turn locally for some budgeting help.
Maybe I’m a softie, but I’d help Junior find that part-time
job and I’d cut back on some family expenses to help with the payments (for
example, the cable bill and meals out), until we could sell the car, pay off
the loan, and get Junior a reliable used car that he can afford.
What would you do? Have you had any good or bad experiences
helping a family member with money troubles? Please let us know how you made
out!
Nancy Castleman – Co-author of
"Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent
the last 23 years teaching people how to get out of debt, save money, and live
better on less. She writes on all these subjects for CreditBloggers.com.
{ 4 comments… add a comment }
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Yes, this happens all the time and there is no easy answer. If Donna lets them repo the car she may be on the hook for the deficiency. If she can sell the car, that may be the way to go.
I remember one couple with otherwise perfect credit who found out the car the cosigned for their son had been repo’d — when they went to get a mortgage and found it on their credit reports!
Nancy is right. It probably would have been better if I had suggested that Mom help the son work through this tough situation. Generally people are more responsive if you don’t back them into a corner. But I admit that when I wrote this column that I was frustrated with the number of questions I was receiving that were very similar. My concern is that people aren’t considering the commitments they’re making. When you sign a note for a 6-year car loan you’re committing to making payments for 6 years. When you co-sign that note you’re agreeing to make up any shortfall if the borrower can’t keep their promise.
I wouldn’t sign up for most magazines for 6 years! I’m a car guy and I can’t imagine wanting a car so bad that I’d agree to 6 years of payments.
In any case, I hope that some people who are thinking of making a similar commitment will read the column and think very carefully about the decision they’re making. It could be affecting their life in the year 2013!
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