Dear Mr. Berko:
My brother-in-law and I are sort of friends, and for reasons too complicated to write about, he has to borrow $48,000. He is willing to give me a 15-year first mortgage on his home, which he built and is easily worth $130,000. The bank wants to charge him 9 percent on a home-equity loan because he has bad credit and is self-employed with no earnings history. I have the money earning 0.55 percent, and I can’t afford to lose it. I thought to charge him 8 percent, which upset him and my wife a little bit. He thinks 5 percent would be fairer. He and I decided to write to you and ask for your thoughts on what rate I should charge for this loan.
M.M., Bloomsburg, Pa.
That you and your brother-in-law are “sort of friends” concerns me. What does “sort of” mean? That he and your wife (his sister?) became “a little bit” upset at 8 percent interest suggests to me that there could be a muddy road ahead. Detour! I once had three brothers-in-law, and frankly, I couldn’t abide by any of them. Relatives who borrow money seem to feel that family members don’t have to be paid back.
Family members are the worst people in the world with whom to do business. So if you cherish your family, you must engrave the above sentence on the forefront of your mind and etch it on the cover of your checkbook. During the 37-plus years I’ve been writing this column, I’ve received dozens of similar emails and letters from readers who have deeply regretted lending money to relatives and children. I received a letter several months ago regarding a $67,000 business loan to a brother that was secured by four long-haul trucks, trailers and forklifts. Here is an excerpt: “The loan came due in 2007. So after three years of trying to get my money back, I had to hire an attorney, who forced my brother to sell the encumbered equipment. Now my large family considers me a pariah for causing my brother to lose his business. Even my 87-year-old mother is angry with me. We have been excluded from some family gatherings, and our children are hooted at by other family members.” M.M., you need to be mindful that some families live in the bozone layer of the atmosphere and will hold a grudge for generations.
Now, $48,000 isn’t chopped liver, and if you must lend money to your brother-in-law, then you must hire an attorney and spell everything out. It may cost you a grand, but this money is better-spent than you can imagine. And be sure to split the cost between you and the brother-in-law. I would divide the loan into two tranches. 1) $24,000 at 8 percent that can be amortized monthly for 15 years, requiring a payment of $229.36 each month. Therefore, at the end of 15 years, you will have received a total of $41,284.80. That includes $17,284.80 in interest, on which you will have paid income taxes each year over the 15-year time frame. 2) $24,000 tied to the cost of things you use every day. However, do not use the government’s definition of inflation, which most folks consider a joke. Rather, figure out what $24,000 in various commodities you use would cost today, such as 500 gallons of gasoline ($2,000), real estate taxes on your home ($1,500), annual costs for Internet, cable and cellphone ($2,500), annual costs for health insurance ($6,500), 500 large jars of Peter Pan creamy honey-roast peanut butter ($2,500), 500 large boxes of Cheerios ($2,500), 2,000 pounds of apples ($2,000), etc., until the list totals $24,000. And in 15 years, your brother-in-law must agree to purchase those items for you during the next year or two or three as you use them. Then, only after you’ve gotten all your Cheerios and peanut butter, you can give your brother-in-law clear title to his home.