Loan to friend. Secure with second mortgage.

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Loan to friend. Secure with second mortgage.

Post by tc101 »

I am 71 and comfortably retired. I have a very good friend who I have known for almost 50 years. He has always worked hard and been a good honest person, but he has made very bad decisions, and now, at age 72, he is working at Home Depot. He has about $10K in credit card debt at about 20% interest.

I could just make him a $10K unsecured interest free loan to pay off the credit cards, but that would seem too much like a gift and would make us both uncomfortable.

I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.

4% is more than I make on any of my CDs. It is higher than a regular mortgage rate. It is generous for a second mortgage, but not absurdly generous.

A second mortgage would cost about $600 attorney fees, would be added to the loan, so would pay for itself in about 6 months. Also, if he dies any time soon, I would eventually get the money back. It is not all that important that I get the money back, but if he is dead I would rather pass the money on to my family than his.

What are your thoughts on this?

I am adding what follows to the original post, because I know people often read the first post and then respond without reading all the posts in between, and I think this is an important point:
Lots of people asked what kind of bad decisions he makes, and there seemed to be the assumption that he is a spend thrift. That is not the case.

He had a business as a construction contractor and usually under bid and made very little money for the good work he did. He paid too much for equipment he didn't really need, then sold it too cheap.

At one point he had $5K extra cash from a job that went well. He had regular income then, and $15K credit card debt. He would not need that $5K any time soon. I asked him what he was going to do with the extra $5K. He said he would put it in his checking account. I pointed out that the checking account paid zero interest and the credit cards were charging over 20% and it would make more sense to pay off the cards. This seemed like a big revelation to him. He thanked me profusely and acted like I was a financial genius.

Things that we take for granted as bogleheads are not really so obvious to lots of people.

Remember that half of all Americans are below average in intelligence.
Last edited by tc101 on Mon Feb 08, 2021 2:12 pm, edited 1 time in total.
. | The most important thing you should know about me is that I am not an expert.
dougs93jeep
Posts: 113
Joined: Sat Jan 30, 2021 11:18 am

Re: Loan to friend. Secure with second mortgage.

Post by dougs93jeep »

Loans to friends are a bad idea.

I had a good friend loan me money in HS/college for a car. It worked out fine, but looking back the risk was not worth it.
kaudrey
Posts: 1115
Joined: Fri Nov 22, 2013 2:40 pm

Re: Loan to friend. Secure with second mortgage.

Post by kaudrey »

You've been friends for 50 years. I think it is fine, and is set up like a business transaction.
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: Loan to friend. Secure with second mortgage.

Post by tc101 »

Loans to friends are a bad idea.
I think that is generally true, which is why I asked for discussion here.

In this case it is kind of like a gift disguised as a loan to avoid the embarrassment of giving a gift. Does that make sense?
. | The most important thing you should know about me is that I am not an expert.
User avatar
FrugalProfessor
Posts: 365
Joined: Thu May 25, 2017 11:34 am
Contact:

Re: Loan to friend. Secure with second mortgage.

Post by FrugalProfessor »

I "loaned" $10k over 10Y ago to a brother-in-law who is now a podiatrist making >$150k/year. When I asked to be repaid recently, his wife essentially called me the devil. I will never see that money again and the relationship is forever damaged.

I'd strongly advise against making the loan. Pouring money on a dumpster fire doesn't extinguish the cause of the fire (bad money habits). It may suppress the fire temporarily, but certainly not permanently.

If you chose to intervene, which I don't encourage, I'd suggest you help your friend put together a budget or help to minimize recurring bills (cell phone, TV, internet, etc).
I blog. Taxes are the lowest hanging source of alpha. I eat tax alpha for breakfast.
dougs93jeep
Posts: 113
Joined: Sat Jan 30, 2021 11:18 am

Re: Loan to friend. Secure with second mortgage.

Post by dougs93jeep »

How comfortably retired are you? Could you just gift him the money?
User avatar
Watty
Posts: 22405
Joined: Wed Oct 10, 2007 3:55 pm

Re: Loan to friend. Secure with second mortgage.

Post by Watty »

tc101 wrote: Mon Feb 08, 2021 11:45 am What are your thoughts on this?

... secured by a second mortgage on his house.
One problem is you may not know his entire financial picture.

I doubt that $10K is enough to really make any long term difference in his situation and having a long term friend may be more valuable than a temporary respite from the credit card. A loan like that could risk that friendship.

For example it might make more sense for him to downsize from the house to a condo if that would free up a lot of home equity and you loaning him the money may just delay hard decisions like that.

He would be on the younger side for getting a reverse mortgage but that would be another option to consider. A problem with those is that they can sometimes enable people to live above their means which could cause him more problems when he is older if he does not have many other assets.

You might suggest that he post his information here using the suggested format as a guideline to see if he could get some help in coming up with a long term plan.

viewtopic.php?f=1&t=6212
30west
Posts: 39
Joined: Wed Jul 29, 2020 7:22 am

Re: Loan to friend. Secure with second mortgage.

Post by 30west »

You are assuming that your offer of a loan will not embarrass you're freind, or at least embarrass him less than a gift. Is he truly struggling? Is it possible he enjoys the HD job, and wold work regardless of CC debt.

If he is just bitching about his job over beers, maybe your roll is to listen. You dont have to fix it for him. That would be a sure way to change the dynamic in the relationship, and not for the better.

Has he asked you for financial help directly?
User avatar
galawdawg
Posts: 2162
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Loan to friend. Secure with second mortgage.

Post by galawdawg »

tc101 wrote: Mon Feb 08, 2021 11:45 am I am 71 and comfortably retired. I have a very good friend who I have known for almost 50 years. He has always worked hard and been a good honest person, but he has made very bad decisions, and now, at age 72, he is working at Home Depot. He has about $10K in credit card debt at about 20% interest.

I could just make him a $10K unsecured interest free loan to pay off the credit cards, but that would seem too much like a gift and would make us both uncomfortable.

I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.

4% is more than I make on any of my CDs. It is higher than a regular mortgage rate. It is generous for a second mortgage, but not absurdly generous.

A second mortgage would cost about $600 attorney fees, would be added to the loan, so would pay for itself in about 6 months. Also, if he dies any time soon, I would eventually get the money back. It is not all that important that I get the money back, but if he is dead I would rather pass the money on to my family than his.

What are your thoughts on this?
It is a kind thought. However, I join the others who caution you not to do it.

All you are doing is saving him some interest. If he is able to pay this debt off in two years, then he will pay you about $11,000. Paying it off in the same time period to the credit card issuer would result in total payments of about $12,266. So you are saving him essentially $50/month.

If you help him payoff this card immediately and shift his payments to you, he may just turn around and put another $10k on the card and he ends up in more detrimental financial situation than he was before your help. Your post suggests that this is not a one-time crisis resulting from an unforeseen difficulty, such as a hospitalization, but rather that your friend has well-ingrained behavior of making "very bad" decisions.

Unfortunately, other than encouraging him to change his spending habits (which may be impossible if this is a life-long problem), there is nothing you can do to help your friend. He is fortunate he is able to be employed and can work to pay his debts. If at some point he is unable to provide food, clothing and shelter for himself, you may need to connect him with social services in your local area.
VoiceOfReason
Posts: 168
Joined: Sat Jan 02, 2016 6:54 pm

Re: Loan to friend. Secure with second mortgage.

Post by VoiceOfReason »

Watty wrote: Mon Feb 08, 2021 12:13 pm
tc101 wrote: Mon Feb 08, 2021 11:45 am What are your thoughts on this?

... secured by a second mortgage on his house.
One problem is you may not know his entire financial picture.

I doubt that $10K is enough to really make any long term difference in his situation and having a long term friend may be more valuable than a temporary respite from the credit card. A loan like that could risk that friendship.


Agree with this.

If you make this an actual loan (even if it's in name only and you don't expect repayment) you run the real risk of altering your friendship permanently with this person. They may avoid you, feel shame or guilt about not paying you back, etc. I'm going to assume that since you've been friends for 50 years you probably don't want that.

My suggestion is to tell him that you are not comfortable loaning him money but you are comfortable gifting it to him and have no expectation of repayment. If he can accept those terms, then do it. If he cannot then I would not give the money.

This will keep you mentally from holding any grudge and it will also reduce the likelihood that he will feel guilt or shame and it alters your friendship. If he does somehow actually pay you back, then great.
bob60014
Posts: 1908
Joined: Mon Jul 31, 2017 8:59 pm
Location: The Land Beyond ORD

Re: Loan to friend. Secure with second mortgage.

Post by bob60014 »

Have him contact the credit card company and ask them to lower the rate. In these times they may work with him.
GuyInFL
Posts: 366
Joined: Thu Aug 04, 2016 7:17 pm

Re: Loan to friend. Secure with second mortgage.

Post by GuyInFL »

I'd consider checking out Lending Club, Peerform and Prosper.
User avatar
Brianmcg321
Posts: 1395
Joined: Mon Jul 15, 2019 8:23 am

Re: Loan to friend. Secure with second mortgage.

Post by Brianmcg321 »

A great way to end a friendship is to loan them money.

This guy needs to get control of his finances.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Wricha
Posts: 758
Joined: Sun Mar 25, 2012 10:33 am

Re: Loan to friend. Secure with second mortgage.

Post by Wricha »

Since it is not a material amounts of money to you and you think of it as gift your fine. I lent a good friend $5k 20 years ago never ask him for money. Didn’t get paid back. I was ok because in my mind it was a gift. Five years ago I received a check from him for $10k sent back the check and said I would only accept $5k which he did. Money lent to friends and families should be treated as gifts with absolutely no expectations or don’t lend it.
User avatar
Nate79
Posts: 7067
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Loan to friend. Secure with second mortgage.

Post by Nate79 »

If he can't pay you back what do you plan to do? Foreclose on his house? Gift him the money? Forget about it?
User avatar
JoeRetire
Posts: 8110
Joined: Tue Jan 16, 2018 2:44 pm

Re: Loan to friend. Secure with second mortgage.

Post by JoeRetire »

tc101 wrote: Mon Feb 08, 2021 11:45 am I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.
Unless you are a bank, this is a terrible idea.

Help him find an actual lender (bank) that will give him a second mortgage. Or give him a gift. Or do nothing and wish him well.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
User avatar
ResearchMed
Posts: 11571
Joined: Fri Dec 26, 2008 11:25 pm

Re: Loan to friend. Secure with second mortgage.

Post by ResearchMed »

Not sure if this would work for your friend (or you!), but IF it's okay if you never get paid back, then just start this as a simple gift, something you are happy to help after 50 years of a special friendship. Phrase it as appropriate, etc.

Don't even say something like, "... and if you can pay it back some day..." because that will introduce the "poison" of a loan outstanding.

Give it genuinely happily or not at all.
And maybe IF he gives it back, to make it very clear that you really meant it without any strings attached, then thank him and ask what charity of his choice he would like you to donate the amount to.

Just a thought...

But I also worry about how he got in this situation. If it wasn't some sort of very unusual one-time problem, then this could end up becoming an ongoing issue, one that you end up feeling some responsibility for (?).

And forget the second mortgage. You'd need to be prepared to walk away (see above, etc.) OR to foreclose if necessary, and I doubt you'd want to go there. Ditto your heirs.

RM
This signature is a placebo. You are in the control group.
oldfatguy
Posts: 957
Joined: Tue Feb 27, 2018 1:38 pm

Re: Loan to friend. Secure with second mortgage.

Post by oldfatguy »

tc101 wrote: Mon Feb 08, 2021 11:45 am
I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.
Why doesn't he just get a home equity loan, cash-out refinance, etc.?
gutrageous
Posts: 121
Joined: Sat Aug 16, 2008 2:49 pm

Re: Loan to friend. Secure with second mortgage.

Post by gutrageous »

tc101 wrote: Mon Feb 08, 2021 11:45 am I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.
[ quote fixed by admin LadyGeek]

I'm not sure of the laws in your state, but in TX, there are only certain types of loans that can create and perfect any kind of security interest in a homestead and personal loans aren't one of them.

All the other issues that have been raised aside, you might want to check into that.

Gutrageous
User avatar
arcticpineapplecorp.
Posts: 7915
Joined: Tue Mar 06, 2012 9:22 pm

Re: Loan to friend. Secure with second mortgage.

Post by arcticpineapplecorp. »

at first when I read this I thought, that's a nice friend. then I read this:
4% is more than I make on any of my CDs.

Also, if he dies any time soon, I would eventually get the money back.
and thought, hmmm...this is more of a situation that's mutually beneficial, i.e., you're trying to get something out of it. nothing wrong with that and you're being honest about it but I wondered how you came up with 4% other than it's higher than you're earning now and lower than what he'd pay if he got his own second mortgage.

question: does he have equity in the home? how do you know? If he doesn't and doesn't pay you back you could get nothing back (i.e., if the house sells it all might go to payoff first mortgage and you get nothing back).

how would you feel if you lent him this money and he doesn't use it to pay off the CC debt and instead spends it?

how would you feel if he pays off the CC debt, but then gets himself back in $10,000 CC debt in the future?

how would you feel if he starts to pay you back faithfully for a few months and then hits a rough patch (however he defines that) and suddenly can't pay you back but will "just as soon as he's able"? That gonna affect the friendship at all? Be honest.

I wouldn't do it, especially if he wasn't specifically asking for help. If he asked for help, that might be different.

The way I look at it if I was going to loan to anyone, I'm going to want to lookover the complete financial picture of the borrower...just like a bank would do. Because without looking at one's spending habits, you don't really know the whole picture.

It's kinda like something I read from a boglehead that I won't soon forget. (I know your friend didn't ask)
If someone asks you for a loan you say to them:
"What'd the bank say when you asked THEM for a loan".
They usually say, "That stinking bank, they wouldn't lend me any money!"
To which you'd say, "If a bank won't lend to you, why would I?"

I've seen many sob stories over the years and yet I've seen and heard things from these same people that I thought...hmmm, if they only did X,Y,Z, they wouldn't be in the situation they're in. They might not know that and would do things differently if only they knew. But sometimes people don't want to know these things. There may be many reasons for this: they may have a victim mentality, they may not want to take responsibility, fear change, never developed the habit of saving, etc.

i once had a coworker complaining about her car that needed a repair (around $500 or so) and yet just a month before she spent $500 on a new phone (that she didn't really need because nothing was wrong with her older phone). Stuff like that. Every situation is different but some elicit less sympathy than others. The devil's always in the details as they say.

point is, if you're lending money you have a right to audit the books and see where the money's going. like a previous poster you're assuming he's working because he needs to, but that could be an assumption.

would you feel differently if you found out he had significant money at a point (inheritance, other) but spent it away?

just some things to think about.
Last edited by arcticpineapplecorp. on Mon Feb 08, 2021 1:29 pm, edited 1 time in total.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
LittleMaggieMae
Posts: 767
Joined: Mon Aug 12, 2019 9:06 pm

Re: Loan to friend. Secure with second mortgage.

Post by LittleMaggieMae »

I think the loan is a bad idea. I think the lump sum 10K gift isn't that great of an idea either. It puts your friend in a weird spot. Gifts come with social obligations usually something "reciprocal" and they can't reciprocate the 10K gift in any way shape or form.

You know what got your friend in debt, and you may know how diligently he is working to pay off the debt.
If he's working to pay off the debt and having trouble making ends meet each month - perhaps smaller "gifts" of money or gift cards over time would be the way to go.

I have a friend who has been on hard times for many years (and it isn't ever going to get better - fixed income). I gift them "warm air" in the winter (via a gift certificate that is used to pay the natural gas company) I gift them "cold air" in the summer in the form of a gift certificate to pay the electric company. I have a pretty good idea of how high these bills will be during the winter/summer seasons and gift appropriately. They can handle the "typical" sized gas or electric bill but winters and summers are unpredictable - and I don't want my friend to have to choose being being warm (or cool) and food or a doctor's appt or medicine. I also give gift cards to various department stores and groceries during the year. There are an awful lot of "holidays" on the calendar that can be gift giving occasions.

My friend can reciprocate these 50/100/200 dollar gifts with a simple thank you for example (or sometimes baked goods will be shared with me or some other inexpensive thing that we both enjoy.) I would think a simple thank you might seem or feel "ungrateful" or "not enough" to acknowledge a 10K gift thus making things really awkward.

Maybe you can think outside the box for a way to help your friend?
User avatar
FIREchief
Posts: 6701
Joined: Fri Aug 19, 2016 6:40 pm

Re: Loan to friend. Secure with second mortgage.

Post by FIREchief »

FrugalProfessor wrote: Mon Feb 08, 2021 11:56 am I "loaned" $10k over 10Y ago to a brother-in-law who is now a podiatrist making >$150k/year. When I asked to be repaid recently, his wife essentially called me the devil. I will never see that money again and the relationship is forever damaged.
Ouch! So is this guy your wife's brother?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: Loan to friend. Secure with second mortgage.

Post by tc101 »

How comfortably retired are you? Could you just gift him the money?
Very securely retired. Not rich but I live way below my means and have simple tastes. I could easily gift him the money but that would be socially awkward.
Has he asked you for financial help directly?
No.
If he can't pay you back what do you plan to do? Foreclose on his house? Gift him the money? Forget about it?
Gift him the money and forget about it.
. | The most important thing you should know about me is that I am not an expert.
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: Loan to friend. Secure with second mortgage.

Post by tc101 »

I wondered how you came up with 4% other than it's higher than you're earning now and lower than what he'd pay if he got his own second mortgage.
Just that. Off the top of my head it seemed reasonable.
how would you feel if you lent him this money and he doesn't use it to pay off the CC debt and instead spends it?
Real bad. I'd ask him to promise to use it to pay off CC before making the loan.
. | The most important thing you should know about me is that I am not an expert.
jsapiandante
Posts: 189
Joined: Thu Jul 30, 2015 5:58 pm

Re: Loan to friend. Secure with second mortgage.

Post by jsapiandante »

I've loaned money to friends before thinking it would help them get out of a rut with the impression that I would not get that money back and it would propel them in to better decision making next time. I've been disappointed every time I've done so. It's more the fact that the money I've loaned/given to these people didn't help themselves and instead chose to put themselves in more financial trouble. To this day (10-15 years later), they are still living paycheck to paycheck even though they are making multiples more in come.
User avatar
Abe
Posts: 2257
Joined: Fri Sep 18, 2009 5:24 pm
Location: Earth in the Milky Way Galaxy

Re: Loan to friend. Secure with second mortgage.

Post by Abe »

I have had a lot of experience with this. If it were me, I would not loan him the money. If you do be prepared to lose his friendship and your money. Also, if you take a second mortgage, that does not guarantee you will get your money. If there is a foreclosure on the property, either by you or the first mortgage holder, you very likely would have to pay off the first mortgage in order to protect your second mortgage. As I said, I've been through all this before, and I'm seeing all kinds of red flags. Don't let your friendship cause you to make a mistake. I'm sure this is not what you want to hear, but this is my opinion.
Slow and steady wins the race.
Dave55
Posts: 1108
Joined: Tue Sep 03, 2013 2:51 pm

Re: Loan to friend. Secure with second mortgage.

Post by Dave55 »

Gift or do nothing. If I were to gift, I would pay the credit card directly for him.

Dave
"Reality always wins, your only job is to get in touch with it." Wilford Bion
delamer
Posts: 11271
Joined: Tue Feb 08, 2011 6:13 pm

Re: Loan to friend. Secure with second mortgage.

Post by delamer »

Have you considered just putting the lien on the house and not requesting current payments?

You’d just get the money when he sells the house.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
alfaspider
Posts: 3575
Joined: Wed Sep 09, 2015 4:44 pm

Re: Loan to friend. Secure with second mortgage.

Post by alfaspider »

I don't see the point of securing the loan with his property unless you actually intend to enforce those rights if he defaults. Are you really going to foreclose on him?

If he actually has equity, could he get a HELOC and use that instead?

Anyhow, I second those who recommend just making a gift if your goal is to help him out. He might not accept it, and that's ok too.
Last edited by alfaspider on Mon Feb 08, 2021 2:08 pm, edited 1 time in total.
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: Loan to friend. Secure with second mortgage.

Post by tc101 »

Lots of people asked what kind of bad decisions he makes, and there seemed to be the assumption that he is a spend thrift. That is not the case.

He had a business as a construction contractor and usually under bid and made very little money for the good work he did. He paid too much for equipment he didn't really need, then sold it too cheap.

At one point he had $5K extra cash from a job that went well. He had regular income then, and $15K credit card debt. He would not need that $5K any time soon. I asked him what he was going to do with the extra $5K. He said he would put it in his checking account. I pointed out that the checking account paid zero interest and the credit cards were charging over 20% and it would make more sense to pay off the cards. This seemed like a big revelation to him. He thanked me profusely and acted like I was a financial genius.

Things that we take for granted as bogleheads are not really so obvious to lots of people.

Remember that half of all Americans are below average in intelligence.
. | The most important thing you should know about me is that I am not an expert.
vas
Posts: 198
Joined: Thu Mar 06, 2014 12:51 pm

Re: Loan to friend. Secure with second mortgage.

Post by vas »

Lend money to an enemy, and thou will gain him, to a friend and thou will lose him. - Benjamin Franklin
There is nothing you can't prove if your outlook is sufficiently limited
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: Loan to friend. Secure with second mortgage.

Post by tc101 »

This has been a great discussion so far. Thank you all for your input.

The secured loan is obviously a bad idea. I will either just loan him the money interest free and ask him to pay me back when he sells the house, or I will gift him the money, or I will do nothing for now.
. | The most important thing you should know about me is that I am not an expert.
runninginvestor
Posts: 459
Joined: Tue Sep 08, 2020 8:00 pm

Re: Loan to friend. Secure with second mortgage.

Post by runninginvestor »

It is your money, so ultimately up to you.

But you mentioned that if it was just given as a gift it would make you both uncomfortable. I would feel more comfortable giving my friend a gift than having them owe me money on a loan. In other words, if you can't pass that money along as a gift without it being uncomfortable for both if you, adding the complexity of a loan I don't think would cross that barrier either.


Didn't see your reply above mine indicating similar sentiment.
almostretired1965
Posts: 300
Joined: Mon Nov 13, 2017 2:02 pm

Re: Loan to friend. Secure with second mortgage.

Post by almostretired1965 »

My wife and I are fortunate enough to be in a position where helping out friends and family with temporary cash flow issues has never been a problem, not that we've had to do it very often. Our view has been to always treat it as a gift, regardless of how it is initially set up. No one has actually stiffed us yet (whenever it was explicitly structured as a loan), though I was, frankly, somewhat disappointed in my brother-in-law, whom we bailed out when he lost his job and remained unemployed for a year, never made an attempt to repay us after he got back on his feet (and continued his spend-thrift habits).

Not sure that is actually something you were prepared to do, but if so and if it were me, I would not bother with the second mortgage, but I would specify an exact plan for how the repayment is to be done.
delamer
Posts: 11271
Joined: Tue Feb 08, 2011 6:13 pm

Re: Loan to friend. Secure with second mortgage.

Post by delamer »

tc101 wrote: Mon Feb 08, 2021 2:11 pm This has been a great discussion so far. Thank you all for your input.

The secured loan is obviously a bad idea. I will either just loan him the money interest free and ask him to pay me back when he sells the house, or I will gift him the money, or I will do nothing for now.
I doubt you’ll get the money back when he sells without a lien. And if he dies before he sells, you’ll get nothing without the lien.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
User avatar
eye.surgeon
Posts: 902
Joined: Wed Apr 05, 2017 1:19 pm
Location: California

Re: Loan to friend. Secure with second mortgage.

Post by eye.surgeon »

I wouldn't.

Like so many here, I've done it before and regretted it.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
User avatar
celia
Posts: 12594
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Loan to friend. Secure with second mortgage.

Post by celia »

Credit card debt is different than being hit with a sudden illness or a tree falling on your house. It grows slowly and you can see it, even if you don’t think of the consequences. There’s a good chance that even if the cc was paid off today, he’d be right back in the same spot (or worse) in 6 months or a year.

Without first learning new habits, this gift will probably just be wasted. I call it a “gift” since it won’t be re-paid.
User avatar
Sandtrap
Posts: 13313
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona
Contact:

Re: Loan to friend. Secure with second mortgage.

Post by Sandtrap »

Option 1.

Make it a gift because that's what it is.
Make it a "bailout" gift because that's what it is.
Don't hide or disguise it as a "loan" because, under it all, it's a "bailout" and if your friend refuses the "gift" as a "gift" then that's that.
But, if your friend refuses a cash gift or a direct payment to his credit card, but does accept a "loan". . . then. . . isn't that the same thing because it is secured on your home?
Better to keep it "real" and simple. A heart to heart gift/bailout.

Option 2
The credit card is paid off whether through a cash payout, credit card payoff, or a "loan".
Then, over time, credit card balances rise and rise until there's a loan payment through you to make as well as new credit card balance payments.
What do you do then?

Option 3
There is a loan secured on your home. Friend loses his job, can't make payments.
What do you do then? What will you say?

Option 4
Do nothing.

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
User avatar
beernutz
Posts: 649
Joined: Sun May 31, 2015 12:50 pm

Re: Loan to friend. Secure with second mortgage.

Post by beernutz »

tc101 wrote: Mon Feb 08, 2021 2:11 pm This has been a great discussion so far. Thank you all for your input.

The secured loan is obviously a bad idea. I will either just loan him the money interest free and ask him to pay me back when he sells the house, or I will gift him the money, or I will do nothing for now.
Your friend is lucky to know you.

If you loaned or gifted him the money how sure are you that he'd use it to pay off the CC debt? Alternatively how mad would you be if he didn't pay it off and flew to Vegas or did something equally outlandish instead?

We gifted my mother-in-law many thousands of dollars over the last decade after she'd both reverse mortgaged her home and later declared bankruptcy because of tens of thousands in CC debt with only SS as income and no other assets.

In the year before she passed my wife found out she'd been buying thousands of dollars of "gems" and coin collections on QVC as "investments" for her legacy. It felt like a betrayal but we recognized she was horrible with her finances so it wasn't that unexpected.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
PVW
Posts: 690
Joined: Mon Dec 29, 2014 11:01 am

Re: Loan to friend. Secure with second mortgage.

Post by PVW »

galawdawg wrote: Mon Feb 08, 2021 12:18 pm All you are doing is saving him some interest.
This should be the point you are evaluating. What are you giving up and what are you saving your friend?

The risk versus reward doesn't work in your favor. You're risking $10K and a priceless friendship for the opportunity to possibly save your friend a few thousand in credit card interest. Maybe you think the risk to the friendship is minimal, but there are 2 sides to that and your friend might be too embarrassed to continue if he couldn't repay.

Then again, personal relationships are often impenetrable to logic and I'd probably make some objectively bad decisions if a lifelong friend needed money.
User avatar
galawdawg
Posts: 2162
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Loan to friend. Secure with second mortgage.

Post by galawdawg »

tc101 wrote: Mon Feb 08, 2021 2:07 pm At one point he had $5K extra cash from a job that went well. He had regular income then, and $15K credit card debt. He would not need that $5K any time soon. I asked him what he was going to do with the extra $5K. He said he would put it in his checking account. I pointed out that the checking account paid zero interest and the credit cards were charging over 20% and it would make more sense to pay off the cards. This seemed like a big revelation to him. He thanked me profusely and acted like I was a financial genius.
Has he applied all of his stimulus payments towards the credit card debt? Is he applying all of his Home Depot income towards the credit card debt? If he has done and continues to do those things, he can have the credit card paid off in two (2) years (assuming he is working 20 hrs/wk). Your loan will only save him $50/mo compared to what he will pay the credit card issuer. If he wants to pay it off sooner, perhaps he can get more hours at Home Depot or find a second part-time job.

If he has not done those things, his debt is a bigger problem than just owing $10k on a credit card after wrapping up his business for a modest loss...
User avatar
ResearchMed
Posts: 11571
Joined: Fri Dec 26, 2008 11:25 pm

Re: Loan to friend. Secure with second mortgage.

Post by ResearchMed »

tc101 wrote: Mon Feb 08, 2021 1:53 pm
I wondered how you came up with 4% other than it's higher than you're earning now and lower than what he'd pay if he got his own second mortgage.
Just that. Off the top of my head it seemed reasonable.
how would you feel if you lent him this money and he doesn't use it to pay off the CC debt and instead spends it?
Real bad. I'd ask him to promise to use it to pay off CC before making the loan.
Ah, if irresponsible credit use is a problem and might still be, then even if you paid the charge card balance yourself, what's to stop him from running up the bills again, on the same or new charge accounts?
This is very different from a "one time serious life event" that caused a financial disaster.

This might not be as easy to fix/help as it may have seemed...

RM
This signature is a placebo. You are in the control group.
User avatar
Topic Author
tc101
Posts: 3431
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Re: Loan to friend. Secure with second mortgage.

Post by tc101 »

Has he applied all of his stimulus payments towards the credit card debt? Is he applying all of his Home Depot income towards the credit card debt? If he has done and continues to do those things, he can have the credit card paid off in two (2) years (assuming he is working 20 hrs/wk). Your loan will only save him $50/mo compared to what he will pay the credit card issuer. If he wants to pay it off sooner, perhaps he can get more hours at Home Depot or find a second part-time job.
He works full time at Home Depot and gets a small monthly amount from social security. His wife is currently unemployed. He doesn't have a lot of money left over to pay down the debt, but he is paying it down a little bit, month by month.
. | The most important thing you should know about me is that I am not an expert.
User avatar
galawdawg
Posts: 2162
Joined: Thu Dec 14, 2017 12:59 pm
Location: Georgia

Re: Loan to friend. Secure with second mortgage.

Post by galawdawg »

If he is seventy-two and having to work full-time at Home Depot just to make ends meet, then that is indicative of a lifetime of unwise financial decisions. Not necessarily a spendthrift, but unwise decisions nonetheless. If he and his wife cannot live on their social security income and he has nothing saved for retirement, then how is he going to sustain he and his wife when he is no longer able to work? Loaning him the money to pay off his credit card debt is simply postponing the inevitable.

Does your friend have sufficient home equity for a reverse mortgage? Perhaps they could use the proceeds to purchase an immediate annuity to provide for their monthly needs.

Is he open to budget and credit counseling? If so, you may want to suggest he look at the AARP Foundation, they provide links and resources for seniors in need of financial counseling and assistance: https://www.aarp.org/aarp-foundation/ou ... resources/
Trader Joe
Posts: 2272
Joined: Fri Apr 25, 2014 6:38 pm

Re: Loan to friend. Secure with second mortgage.

Post by Trader Joe »

tc101 wrote: Mon Feb 08, 2021 11:45 am I am 71 and comfortably retired. I have a very good friend who I have known for almost 50 years. He has always worked hard and been a good honest person, but he has made very bad decisions, and now, at age 72, he is working at Home Depot. He has about $10K in credit card debt at about 20% interest.

I could just make him a $10K unsecured interest free loan to pay off the credit cards, but that would seem too much like a gift and would make us both uncomfortable.

I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.

4% is more than I make on any of my CDs. It is higher than a regular mortgage rate. It is generous for a second mortgage, but not absurdly generous.

A second mortgage would cost about $600 attorney fees, would be added to the loan, so would pay for itself in about 6 months. Also, if he dies any time soon, I would eventually get the money back. It is not all that important that I get the money back, but if he is dead I would rather pass the money on to my family than his.

What are your thoughts on this?

I am adding what follows to the original post, because I know people often read the first post and then respond without reading all the posts in between, and I think this is an important point:
Lots of people asked what kind of bad decisions he makes, and there seemed to be the assumption that he is a spend thrift. That is not the case.

He had a business as a construction contractor and usually under bid and made very little money for the good work he did. He paid too much for equipment he didn't really need, then sold it too cheap.

At one point he had $5K extra cash from a job that went well. He had regular income then, and $15K credit card debt. He would not need that $5K any time soon. I asked him what he was going to do with the extra $5K. He said he would put it in his checking account. I pointed out that the checking account paid zero interest and the credit cards were charging over 20% and it would make more sense to pay off the cards. This seemed like a big revelation to him. He thanked me profusely and acted like I was a financial genius.

Things that we take for granted as bogleheads are not really so obvious to lots of people.

Remember that half of all Americans are below average in intelligence.
If I had a friend of 50 years in need I would simply give them the $10,000.

Without any hesitation.
User avatar
gr7070
Posts: 1802
Joined: Fri Oct 28, 2011 10:39 am

Re: Loan to friend. Secure with second mortgage.

Post by gr7070 »

galawdawg wrote: Mon Feb 08, 2021 12:18 pm If you help him payoff this card immediately and shift his payments to you, he may just turn around and put another $10k on the card and he ends up in more detrimental financial situation than he was before your help.

Your post suggests that this is not a one-time crisis resulting from an unforeseen difficulty, such as a hospitalization, but rather that your friend has well-ingrained behavior of making "very bad" decisions.

Unfortunately, other than encouraging him to change his spending habits (which may be impossible if this is a life-long problem), there is nothing you can do to help your friend. L
This! is what happens far, far too often to chronic overspenders. It will very likely here, as well.

You're not helping your friend with this loan; quite the opposite.
Big Dog
Posts: 2540
Joined: Mon Sep 07, 2015 4:12 pm

Re: Loan to friend. Secure with second mortgage.

Post by Big Dog »

Trader Joe wrote: Mon Feb 08, 2021 8:38 pm
tc101 wrote: Mon Feb 08, 2021 11:45 am I am 71 and comfortably retired. I have a very good friend who I have known for almost 50 years. He has always worked hard and been a good honest person, but he has made very bad decisions, and now, at age 72, he is working at Home Depot. He has about $10K in credit card debt at about 20% interest.

I could just make him a $10K unsecured interest free loan to pay off the credit cards, but that would seem too much like a gift and would make us both uncomfortable.

I am thinking of offering to make him a $10K loan at 4%, secured by a second mortgage on his house.

4% is more than I make on any of my CDs. It is higher than a regular mortgage rate. It is generous for a second mortgage, but not absurdly generous.

A second mortgage would cost about $600 attorney fees, would be added to the loan, so would pay for itself in about 6 months. Also, if he dies any time soon, I would eventually get the money back. It is not all that important that I get the money back, but if he is dead I would rather pass the money on to my family than his.

What are your thoughts on this?

I am adding what follows to the original post, because I know people often read the first post and then respond without reading all the posts in between, and I think this is an important point:
Lots of people asked what kind of bad decisions he makes, and there seemed to be the assumption that he is a spend thrift. That is not the case.

He had a business as a construction contractor and usually under bid and made very little money for the good work he did. He paid too much for equipment he didn't really need, then sold it too cheap.

At one point he had $5K extra cash from a job that went well. He had regular income then, and $15K credit card debt. He would not need that $5K any time soon. I asked him what he was going to do with the extra $5K. He said he would put it in his checking account. I pointed out that the checking account paid zero interest and the credit cards were charging over 20% and it would make more sense to pay off the cards. This seemed like a big revelation to him. He thanked me profusely and acted like I was a financial genius.

Things that we take for granted as bogleheads are not really so obvious to lots of people.

Remember that half of all Americans are below average in intelligence.
If I had a friend of 50 years in need I would simply give them the $10,000.

Without any hesitation.
I would do the same, but if you don't want to insult the guy and make it a business transaction, just write up a some sort of promissory note: payable xx per month at the then-AFR rate, or 4%, or whatever rate you choose. A second is just too much of a hassle, IMO.
sd323232
Posts: 896
Joined: Thu Jun 21, 2018 4:45 pm

Re: Loan to friend. Secure with second mortgage.

Post by sd323232 »

i hope you dont want this guy to be your friend in the future. this is a sure way to loose your friend and your money.
123
Posts: 7216
Joined: Fri Oct 12, 2012 3:55 pm

Re: Loan to friend. Secure with second mortgage.

Post by 123 »

sd323232 wrote: Mon Feb 08, 2021 8:46 pm i hope you dont want this guy to be your friend in the future. this is a sure way to loose your friend and your money.
+1 No good deed goes unpunished.
The closest helping hand is at the end of your own arm.
User avatar
dmcmahon
Posts: 2775
Joined: Fri Mar 21, 2008 10:29 pm

Re: Loan to friend. Secure with second mortgage.

Post by dmcmahon »

FrugalProfessor wrote: Mon Feb 08, 2021 11:56 am I "loaned" $10k over 10Y ago to a brother-in-law who is now a podiatrist making >$150k/year. When I asked to be repaid recently, his wife essentially called me the devil. I will never see that money again and the relationship is forever damaged.

I'd strongly advise against making the loan. Pouring money on a dumpster fire doesn't extinguish the cause of the fire (bad money habits). It may suppress the fire temporarily, but certainly not permanently.

If you chose to intervene, which I don't encourage, I'd suggest you help your friend put together a budget or help to minimize recurring bills (cell phone, TV, internet, etc).
+1

Dumpster fire pretty much sums it up. If you are in a position to just give away the money, consider it.
Post Reply