Bank of Ninja

I was over at Girl Ninja’s place last night talking with her lovely roommates (they’re not really that lovely, they just read my blog so I have to make them seem like good people… Hi roommates). Anywho, one of them was talking about buying a “new-to-her” car. She’s a smart cookie ’cause she plans to pay cash. There is one little hiccup, however. She has to sell her current car before she has the liquidity to purchase the new car. She’d basically use the cash from the sale, plus another couple thousand from savings to fund her new ride. Obviously, this causes a problem. She can’t sell her car, without already having purchased the new car, otherwise she’d have no way to get to work, the grocery store, etc.

She’s faced with a couple options.

A) Sell her car on a Friday and buy something before Sunday is over

B) Find someone willing to take make a straight vehicle trade

C) Take out a loan to purchase the new car, sell her car ASAP, and use the sale money to pay back the loan

D) Pay me $10,000/month to be her personal chaueffer

Option A and B could be pretty difficult to work out as option A requires great risk (what if she doesn’t find a suitable car in 48 hours?) and option B may never happen (most people on Craigslist are looking to sell their car, not trade it). After discussing her options a little more, I jokingly said “Why don’t I just loan you the money so you can buy your new car, and then when you sell your current vehicle, you can pay me back…with interest.” This girl obviously knows her stuff as she responded, “No. I’m not taking out a loan to get a new car. Do you think I’m stupid?”

But what would I have done if she responded “Really, that might not be a bad idea?” Would I make the loan? I’ve never been in a situation where I’ve been asked to loan someone money. Would I do it? I’m not sure I know the answer to that question.

My guess is 98% of the time my response would be “Sorry, I’m not a bank. I don’t make personal loans.” But there are a few situations were I would consider it. The most obvious being an emergency. If my roommate called me and needed to borrow $1,000 for car repairs, I would most likely give it to him… on two conditions. 1) That he has the ability to pay me back (meaning he has a job) and 2) That by agreeing to loan him the money, I am fully aware I might not get paid back. That’s not to say I think my roomie would ever stiff me (I’d cut his “you know whats” off if he did), but because there is always the possibility I don’t get paid back. Sure, it would suck to lose a $1,000, but it wouldn’t ruin my financial situation if I did. Worst case scenario, I helped a good friend out in a time of need.

Most PF gurus teach “Never loan money to anyone!” While I think that is generally good advice,  I’d be lying if I said part of me wasn’t at least intrigued by the idea. Honestly, I’ doubt I’ll do it. Mainly because I’ll probably never be asked for money. But if I am, I need to have a game plan. And right now that game plan is: evaluate the request (how much, what’s it for, why don’t they have the money, etc), likelihood of repayment, and my current financial situation (can I afford the loss if I don’t get paid back?). I’m gonna have to do some more thinking on this personal loan issue because I’m not really sure how I feel about it.

Have you ever been asked by a friend or family member for a loan? Under what circumstances would you do it? Anyone dabble with prosper.com or other lending sites? Anyone ever been “burned” after loaning someone money?

32 thoughts on “Bank of Ninja

  1. “She can’t sell her car, without already having purchased the new car, otherwise she’d have no way to get to work, the grocery store, etc”
    .

    Why, why, why?

    Is there no mass transit where you live? No friends, family or co-workers who will help her out during this very short term? No budget subcompact rental cars available?.

    I don’t buy this a bit. I live an area with the worst mass transit system I’ve ever seen.
    When my car broke down several years ago and had to be in the shop I still found a way to get to work. It required two transfers and was a pain but it was doable. I walked to shopping (approx a mile and a half away). I whined about it but it was good for me.

    • Yeah she could probably figure out a way to take public transit to her work location, but it is about 25 miles outside of the city, so my guess is it would make a 30 min drive a 1.5hr bus ride with all the tranfers. You’re right, though. It is a possibility, but a super inconvenient one that she would prefer to avoid. As far as friends helping her out, I don’t know of anyone that doesn’t work and has the ability to either loan her their car for a week or two, or even just drive her to and pick her up from work. We all have jobs we have to get to. She could rent a car, but again that could add up quick if she doesn’t find a car ASAP.

      • 25 miles in a 1.5 hour bike ride. It’d be cheaper to buy her a bicycle then you don’t have to risk your cash and your relationship with her and girl ninja

  2. I have loaned money to friends and family when necessary, and it worked ok. I didn’t have the heart to charge interest as they were really hitting hard times. I would do it again, and I am sure everyone knows I am an ‘easy mark’. But, I have not been burned, and I will probably loan money until I am. (I do have criteria though, I don’t just hand out money left and right.)

    We actually did finance a car and pay it off in the first month. We did that so we could take advantage of getting 500 dollars off for using Ford financing. Paid 38 bucks in interest to get 500 back, not a bad deal.

    Your friend may not have a choice if she has absolutely no other options to get to work. Or, she could rent the cheapest car she can find if she is absolutely dead set against a loan.

    In response to the comment above, we truly have 0 mass transit where I am. I would have to walk miles to get to a bus stop, and that bus wouldn’t get me anywhere near where I would have to go.

  3. Just two months ago I gave a $2000 loan to a very good friend of mine. He needed it because he was in the process of buying a home and needed to show adequate funds in his bank account. I did it because he is a reliable friend in other aspects of our friendship and because he logged into multiple offshore accounts he had and showed me he had the funds he just couldn’t transfer it right away.
    One thing I did do was make him sign a note that I wrote saying he would pay back within 60 days.
    A few weeks passed and he hands me a check paying me back in full…sweet!
    I was skeptical at first because it’s a good sum of money but I’m glad it worked out. But he made me comfortable in lending it by showing me he had funds just not in the states and by signing the note I wrote out.

  4. A bank loan that’s instantly paid back (i.e. within the month) may not be the worst idea if she absolutely can’t find something or someone to help her out ride-wise during the interim period.

    And no, we’ve never been asked to loan anyone any money. But that’s because thus far, we’ve been the askers. Getting married while you’re both knee-deep in your undergrad years humbles a couple, that’s for sure! But I wouldn’t change how we did things. Being dirt poor (earning two college-age salaries) teaches you pretty quickly how to budget and save on any salary. We have taken loans out from our parents for things like tuition that must be paid in full by semester start or a new air conditioner when ours went out because they didn’t want us to drain our savings. Yes, our savings were in sorry shape back in the day! Luckily our parents love us and gave the loans with no interest!

    I haven’t thought about being asked for money, and I’m not sure what we’ll say when the day comes–which it probably will since we’re both about to start our first full-time, real money jobs and we have lots of college-age relatives. Probably just evaluate it like you say you will and go from there. But we’ll probably charge interest. 😉

  5. “This girl obviously knows her stuff as she responded, ‘No. I’m not taking out a loan to get a new car. Do you think I’m stupid?'”

    Option C is not stupid at all. In fact it may be the best alternative. It is not specified from the above how much money is involved, but if it’s a small personal loan for a used car from a bank, and she makes most of it back selling her current car, she can pay it back almost immediately with minimal interest.

    The “Do you think I’m stupid?” comment seems to arise from a rigid position about not taking on debt, no matter what. But with interest rates as low as they are today, there’s no compelling argument against not taking a loan that I see.

    I just bought a new car, paid 30% down, and took out a loan at 3% interest. The actual amount of interest, if paid over 3 years, is very little.

    As for loaning money, I would probably never do it, and certainly not with a written agreement that this is a loan not a gift, and must be paid back by a certain time with a certain interest rate.

    • Larry, I understand that obtaining a 3% loan may not cost you “very little” interest over the three years you plan to pay it back, but don’t you also have to purchase comprehensive and collision insurance as well since it is financed. That makes an insurance policy much more expensive. Maybe that is something you would pay for with all of your vehicles, but if you buy a used vehicle (which my friend is doing) there is a point where the extra cost no longer makes sense.

      • Punch, I don’t know the laws in CA, but I’m not aware that having comp+coll depends on whether the vehicle is financed or bought outright. With an older vehicle you might want to drop collision if you don’t care about the occasional fender-bender. But an older vehicle is obviously more likely to need more repairs, and there are other factors that affect your insurance, perhaps above all the driver’s age if you’re under 25 and whether you have a good driving record. There are also discounts you can get for things like daytime running lights, anti-lock brakes, an alarm system, etc. In New York at least you can also take a 6-hour course that gives you a 10% insurance discount for three years.

        • In cali you have to pay both comp and coll if you finance. It’s the only way the lender has a guarantee to get paid back if you wreck your car.

      • Along the lines of Larry’s thinking…

        I think that option C could make a lot of sense, because it gives her the flexibility of time. This way she won’t have to worry about being able to sell the car immediately, or potentially commute to work (which sounds really far) by mass transit.

        Here’s what I would do. Find a car that is in her price range that she is certain that she would be able to pay off once she sold her car (this is key). She would get this with an auto loan, with the requirements that she could balloon pay to pay it off early.

        As you say she would have to also get comp + col which would up her insurance much more expensive. However, as soon as she sold her old car and paid off the loan she could dump whatever insurance she doesn’t want. Since insurance is paid on a pro-rated basis, so sells her car relatively quickly it shouldn’t be too bad.

        Consider this, if it takes her 1 month to sell her old car (seems more than generous), she would pay one months worth of premium insurance and one months worth of interest. I ran the number for an $8,000 loan with a four year term and 9% interest, and one month would cost her $60 in interest.

        I would imagine that the insurance premium for one month would be about that maybe a little less. So for about $100, she gains the flexibility of time of one month to maximize her profits on her sales. All in all it seems good to me.

        I’ll respond to your original question, Punch, below.

  6. I glanced at this book a year ago or so – you might check out the other reviews on Amazon and/or check it out of your local library:

    “Put It in Writing: Creative Agreements Between Family and Friends” by Deborah Hutchinson and Lynn Toler

    Product description snippet: “Through dozens of true stories, they show how “putting it in writing”—creating a clear written agreement—prevents the kinds of bitter misunderstandings that can destroy relationships and devastate families. Here’s detailed advice on how to choose the right words—and enforce them, too. To make it really easy, they provide perforated forms with model agreements for lending money or property, adult children moving home, sharing a pet, taking care of aging parents, and more.”

  7. My husband and I were approached by his brother to loan him a huge sum of money (huge to me anyway $17,000) which we did not have to loan. Then he asked us to co-sign a loan to get the money. I said no. I had to be the meanie. Although it was hard to say no, especially because my husband is a generous soul who wanted to do it, I knew it would go terribly wrong and it had the serious potential of ruining a burgeoning reconciliation in the relationship between my husband and his brother. I think there are situations in which I might consider a loan, like those you’ve described (when you’re fairly confident that the money will make it back to you in short order, or if it’s a sum you can afford to “lose” if the person can’t pay you back.)

  8. I was about to say the very same thing as Weston above. There must be a way she can get around in the interim, unless perhaps she lives in a rural area, in which case I would suggest she look into renting a car in the meantime. If she has a credit card which includes rental car insurance it shouldn’t be too expensive.

  9. i have never had an issue lending money to family in the past and i will continue to do so in the future. my family is very tight knit so i dont see myself ever being stiffed. when it comes to friends i would have to evaluate the entire situation and circumstances and i would certainily also write up a contract before i lent any significant amount of money!
    Preferred Financial Services

  10. If I were in her situation, I’d use a Zipcar or mass transit or a combination of the 2 until I could got my new car. Honestly, though, the best option might be to carpool with someone who works with her. She can pay gas money.

  11. I once borrowed 3k from my dad. It was the hardest thing I’ve ever done financially and paying him back took about 6 months longer than I anticipated. I think he didn’t think I’d actually pay him, but I try to be a man of principals and dang, it was tough.

    I won’t ever borrow money like that again. Lesson learned. And I didnt have my kneecaps broken over the slow payment…

  12. I’ve lent money to an almost complete stranger before. I was working as a receptionist at my college’s University Center. A new employee was put into the system wrong in Payroll, so her check didn’t arrive in our department. She said it was okay and waited until the next payroll period (2 weeks later). Again, the payroll department fracked up and she wasn’t paid. Rent was due that weekend.

    Even though I only had $600 to my name since I was putting myself through college, I wrote her a $300 check. When she got her paycheck 2 weeks later, she immediately cashed it in at the bank downstairs and handed me $300.

    I figured that if she never paid me back, I was out $300, BUT she was in need and was obviously employed. I felt bad about the whole situation and would have hoped that someone could have done the same for me if that ever happened. It worked out. I don’t even remember her name, but I’m glad I helped. 🙂

    In regards to the roommate who has the car loan phobia, I’d do some research into used cars I’d want. Then I’d try selling on a Friday or Saturday and buying one of the cars I already had lined up as options by Sunday. Worse case scenario, she rents a car for a week if all her options fall through and she has to find something else. A good used car just isn’t that hard to find if she does some research in advance.

    Now, what I would actually do is buy my new car with the money I had on hand and finance the rest at the lowest rate possible. Then I’d sell my old car and pay off my new one. It’s just less stressful to me to handle each part without time hanging over my head…that would be worth the $50 in interest I might end up paying. I’ve sold 2 cars on Craigslist and the longest it took was 5 days…

  13. I’ve never really had enough money to loan, but my folks have been approached in the past for loans. My dad requires a contract saying they will not only pay back the money borrowed but the broker fee for selling the stock he would need to get the funds (if he didn’t have it liquid) and the interest he would have earned from that money. Needless the say not a lot of family members ask to borrow money from my parents and a few have gotten upset with my dad for his terms.

    When I needed money a few months ago for surgery (I stupidly bought cheap health insurance thinking I’d save money) my dad was going to let my husband and i borrow money (which my husband didn’t feel comfortable doing, but we needed) but then decided to just give us the money, since he felt it would just be easier and it was a medical need.

  14. I think that any sort of loan between family members and friends are dangerous. Before you lend anyone money a friend or family member ask yourself (out loud even) how would you feel if you didn’t get paid back.

    Don’t go into a personal loan without knowing the answer to that because the worst (and best) part of life is that it’s unpredictable. Sometimes things just go wrong, and if you are considering stepping into that, then you should be very clear with yourself and them what your expectations are.

    In terms of loaning money, I think I’d have a hard time loaning money to a friend. But to a family member I’d probably cough up the dough in an instant. One thing however, is that I would go into it assuming that I wouldn’t get the money back. If in the end I do, then that’s just bonus.

    PunchDebt, I love these kinds of articles, because it is not only entertaining for us, but it gives us an opportunity to reflect and think about yourselves. I appreciate that.

  15. I’ve lent money to a friend and been paid back. I also lent money to a friend who paid back a little bit and then stopped mentioning it. It’s been almost 20 years now, so I’ve pretty much written it off. This friend is in a world of financial hurt and may never dig back out.
    Right now I have several loans out, to the tune of more than $2,100 — and I have the feeling it could be years before I see any of it.
    The bank, unfortunately, is now closed unless it is a family member’s serious emergency. At midlife, with only freelance income, I have decided that I’d better work at securing my own future before I bankroll other people.
    Sigh.

  16. Dude you need an education in auto lending lol. I love lending money to people to buy things like car’s, houses and motorcycles. You see because those are investments that have collateral. By lending money on those investments it’s like buying a piece of that item for yourself. Lets look at cars any one or any institution can be named as a lien holder. In your case you would lend the money to your friend to buy the car and in exchange you are labeled on the title as the lien holder. That mean’s that she can not sell or trade the car with out your signature. Once she has paid you in full you simply sign the title releasing the lien and the car is free and clear to the owner. If she fail’s to pay you then you can file to reposes the car and you get your self a new ride. Typically not what you wanted but hopefully it has some equity and you can then get you cash back by selling it. With houses you get to take a position on the mortgage. In my advice make sure there is equity and don’t take anything other then second position on the mortgage or your very likely to not see any return. Well best of luck on your investment choices.

  17. never loan money to family (exceptions: health/super emergency… not car repairs… i mean super emergency). Loaning money to family is like giving them the money. its awkward to ask for the money back and its awkward if they don’t pay you. that’s just bad business.

    don’t let your 30 year old brother-in-law move into your place when they have no car and don’t want a car payment and don’t want to to “upgrade” their career path from serving Italian food but would rather live with you for free and save money to buy a junker car 6 months to a year from now… that is even worse business!

  18. It’s all situational… there’s no one-size-fits-all answer for your question. But I would advise NOT lending Girl Ninja’s roomie the money. Save yourself a lot of potential drama, headache and ill will. Let’s face it: sh*t happens. And who knows WHAT will happen after the loan. Will she have trouble selling the used car? Will she get less for the used car than she expected? Maybe she’ll get in a car accident and have limited funds while things are sorted out. And though ideally the transaction goes as smoothly as possible, you just never know. Why even risk losing your hard-earned cash, that you’ve acquired by making wise decisions?

    I speak from experience: I unfortunately fell out with one of my best friends and an ex-boyfriend (he was my boyfriend at the time) over unrepaid loans. In each instance, I was completely shocked by their behavior. I had known both individuals for a loooooooong time — both were on fairly solid financial footing. I considered them family. But again, sh*t happens. And once they get the money, it was not a priority to pay me back.

    A couple years later, I nearly fell out with a family member over money as well. He was about to be evicted from his apartment… his budget had been thrown off due to an injury and he would pay me back with his next paycheck… So I did the Christian thing and helped him out. Well, the ‘next paycheck’ turned into the next month… which turned into after Christmas… which turned into “let’s do $100 installments.” If another family member wouldn’t have stepped in — that relationship would’ve been toast, too.

    Maybe I just attract trifling, broke ass people. Lol. But before the loans, these were quality, wholesome relationships. There weren’t glaring red flags. It’s was peachy. Money changes everything. Save yourself the drama and stress. Let the girl go to the bank and handle her business like that. Really and truly. That’s her problem, not yours. Friends, family and money do not mix.

    Sorry to have written a book, but as one financially responsible 20something to another — please don’t do it. You’ll eventually get burned.

  19. My parents have gotten a loan from a family friend before and they drew up paperwork stating the terms and everything and had it notarized. I don’t think there was any doubt on either side about the money being paid back, but just to be sure and safe they drew up the document.

  20. Years ago, my dad lent a relative several thousands of dollars. He still hasn’t gotten it back – the guy says he can’t afford to, but apparently he’s going on vacation in a couple weeks.

    Generally, I’ll loan out small amounts (Under $20), but nothing more. Not like anyone would ask me for cash anyways – I’m a perpetually-broke college student.

    • Oh, except for the time my sister borrowed $575 so my parents wouldn’t know SHE was broke. But I live with her, so could have pestered for the money any time.

  21. Years ago, it is rumored that one of my crazy relatives wrote letters to all other family members, threatening suicide because she was broke. She had liquidated savings & maxed out all credit cards & given them to a lover. Who knows whether she was truly suicidal. the husband knew nothing of it. She got a few thousand from a few well-meaning but misled relatives, and as far as I know, to this day, never paid them back.

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