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Read This Before Lending Money to Friends, Family

Over the years I’ve heard from dozens of readers who have lent money to friends and family members, only to have become outraged when the deal goes sour. The problem is they write to me after they’ve made the loan and have been waiting months, even years, for repayment, without success, hoping I can wave a magic wand to get their money back.

I always tell these readers that I wish they’d written to me before they lent the money. Doing things right from the start makes all the difference in the end. Here’s how:

 

One person lending money to another

1. Accept reality

Lend only the amount of money you can afford to give as a gift. Don’t tell your potential borrower this, but know in your heart that the chances of you ever being repaid in full are fairly slim. That’s a fact of life. There’s a reason this borrower is coming to you and not to a bank or conventional lender to borrow money.

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The Ugly Truth About No-Interest No-Payments Offers

Have you ever wondered how retailers can possibly afford to offer the no-interest, no-payments, no money down kind of deals you see advertised? That was the subject of a question I received recently.

Woman with hand to her chin wondering about no-interest no-payments retail offers

Dear Mary: There are several appliances, electronics, and furniture stores in our area that run television commercials offering nothing down, no-interest, no-payments until 2022. It sounds like I can just walk in and take what I want and not pay for three years! How do these companies really make money? Kate

Dear Kate: First, these offers are on approved credit and come with a lot of other fine print. You need pristine credit to qualify for those attractive terms.

Good luck qualifying

One retailer told me only about 25% of the people who apply for these amazing no-interest no-payments offers,  designed only to get buyers through the door, can actually qualify. The other 75% are offered some other deal with horrible terms. People often accept these terms because, by the time they fill out the paperwork, they’re so emotionally involved and have their hearts set on that “free” absolutely awesome deal, they’re anxious to sign anything.

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Pay Down or Pay Ahead? It Can Be Confusing

Years ago I learned a lesson I won’t have to learn again. It was that poignant. It was during a time when mortgage interest rates took a nosedive and we benefited by refinancing our high-rate mortgage.

The transaction closed in late August with the first payment due in October. Rather than take a month off from making a mortgage payment we made an unscheduled payment in September to reduce the principal balance right off the bat. We sent a letter with the payment and wrote “Principal Prepayment” on the check.

A few weeks later we got a statement showing that the payment had been credited to the October payment, not to pay down the principal as instructed. The confused customer service rep was kind but hardly apologetic when she explained that someone must have assumed that we really wanted to “pay ahead” rather than “pay down.” It took a little persistence to convince her to the contrary.

Applying that payment to the principal balance was good for us because every penny of that unscheduled payment went to reduce the balance—no interest was due until October. That was profitable for us, but not for the lender.

By reducing the principal at the beginning of the loan, we would go on to save more than $4,000 in interest and cut three months off the term, which we did and oh what a happy day that was!

On the other hand, applying it to the October payment would have put almost the entire amount into the lender’s pocket in the form of interest.  Read more

Your Own Personal Loan Shark

Imagine paying outrageous amounts of interest to a greedy finance company and loving every minute of it. Or how about making off-the-record, back-alley deals with a loan shark so you can skip all the credit checks and paperwork?

a smiling cartoon shark dressed in business suit as pawn shop owner

Impossible? Not if that loan shark is you. You’ll be borrowing from yourself, making payments to yourself and collecting high rates of interest—all from you, for you.

The original idea of the credit union was to get the little person out of the clutches of the big money institutions. Credit unions are still a good idea! But even credit unions have their limits and standards when it comes to qualifying for personal loans. Being your own lender simplifies even the credit union strategy to just one person—you. And when you’re wearing the loan officer hat, dealing with you the borrower, both the lending and repayment benefit only you. What a deal!

So, how does it work?  Read more