Four years ago, Carmen from Tampa, FL, did her brother a solid by letting him move into her home when he was low on cash. She didn’t charge him rent and she even took out a car loan for him — in her name.
Fast forward to now, and their fortunes are reversed. Carmen needs the money, but her brother doesn’t want to repay the car loan. During an episode of The Ramsey Show, Carmen said her brother has “fully recovered” from his financial woes.
He works on commission, has stocks, CDs and retirement savings, and “is living a good life,” she said. Yet, when it comes to the car loan, he told his sister he wasn’t going to “take that upon my credit.”
As Carmen pondered whether she should pay off the remaining loan herself — which is around $11,000 — co-host Ken Coleman told her: “You know what you’re supposed to do.”
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What happened?
Carmen’s husband made a career switch that she says will eventually pay off, but in the meantime, they’re bringing in less money. And to get a mortgage, they were told by their lender that they need to get rid of the car loan debt first.
Carmen didn’t just co-sign the loan; she put it under her name.
So her brother is making monthly payments to Carmen on a car that’s not in his name and that “he’s never going to own,” said co-host Jade Warshaw. If he’s not willing to pay back the full amount of the loan, then Carmen has every right to repossess the vehicle.
“That is not mean, Carmen. That is not a bad sister,” said Warshaw. “That is just you doing something that is very normal and fair by saying, ‘if I’m paying for a car that’s in my name, I’m going to be the one owning it and driving it.’”
If her brother wants to keep making monthly payments, “then he needs to go rent a car,” said Warshaw.
Carmen said a private seller would pay $19,000 for the vehicle.
“I would go get that car from your brother today and sell it instantaneously,” said Coleman.
At that point, her brother can decide whether he wants to buy the car from her, in which case he can pay back his sister for the full amount of the loan and she can transfer the title over to him. If he’s not interested in buying it, she can find another buyer and pay back the loan from the proceeds.
Still, Carmen is hesitant because she doesn’t want to cause a rift in the family. “It already has,” said Warshaw. “The damage you’re worried about being done has already been done.”
Warshaw said she wants Carmen to be respected. “It’s a disrespectful transaction and if you let it continue, he’s not just disrespecting you — you’re disrespecting yourself at that point.”
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Should you loan a family member money?
While you may want to help out a family member in need, a ‘friends and family’ loan should still be treated as any other loan. Otherwise, you could consider the money a gift (particularly if you don’t think you’ll ever see that money again).
About one-third of U.S. adults have provided financial support to friends or family, according to the Consumer Financial Protection Bureau (CFPB). It could make sense in some circumstances — for example, parents may loan their adult child some money when they’re just starting out in their career or don’t yet have a credit history to qualify for a loan.
Whatever the case, if you’re thinking about lending money to a friend or family member, first consider your own financial situation — for example, it’s probably not a good idea to drain your own emergency fund to pay for a family member’s emergency. And, if you do have some extra cash, how much of it can you afford to part with and for how long?
If you do lend money to a friend or family member, put it in writing (you can find several options for templates online by searching under loan agreements). This contract should outline the terms of the loan, such as when you expect it to be repaid (either in a lump sum or a series of payments over a specified period of time).
You should also specify whether you’ll be charging interest on the loan (perhaps the rate you’d be getting if that money was sitting in your high-interest savings account) and what the consequences will be if they can’t pay you back.
For example, in Carmen’s case, if she had made her brother sign a contract before getting a car loan, she could have specified that she’d take back possession of the vehicle if he didn’t pay back the loan in full by a certain period of time.
Another option is co-signing a loan, but only do so if you trust this person — not because you’re feeling pressured by your family to do so. A co-signer is a person “who agrees to be legally responsible for someone else’s debt,” according to Equifax, one of the three major credit reporting agencies in the U.S., along with Experian and TransUnion.
This provides a safety net to lenders, but it also means the co-signer is legally responsible for that debt if the borrower is unable to pay it back. Plus, if you’re the co-signer, that debt will show up on your credit report and could influence your credit score and/or debt-to-income ratio.
If the borrower fails to make payments, that will harm your credit rating — and it will likely put a strain on your relationship.
If you’re already in that situation, like Carmen, there’s no easy way out. “We didn’t say this was going to be fun but… it’s already not fun,” said Coleman, “so let’s go ahead and rip the band-aid off and take possession of the car.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
