Dear Debt Adviser,
I've always been responsible with my finances and have never carried a credit card balance until recently when a family member needed a $7,000 personal loan. Rather than using my savings, I charged it to my credit card with a 9 percent interest rate. Since it doesn't look like I will be getting paid back anytime soon, I'm wondering if it makes sense to use part of my $10,000 emergency savings to pay off the card.
My guess is that you have just made a gift of $7,000 and may be close to losing a relationship with a family member as well. Now, I'm not saying that you have no chance of seeing your seven big ones again, but based on my experience, the odds are against you. The uncertainty about why the family member didn't have an emergency fund to cover this need and why he or she didn't go to a lender are reasons you may not be seeing your money any time soon.
Compounding the issue is that often people in need look at a transaction from a very different point of view. They might believe you have always been lucky and they haven't, and by virtue of making the personal loan, you can spare the money. They also might promise to do their best to repay, so how can you speak up without sounding like a meanie?
Still, you did well by not co-signing a loan for a family member. Co-signing is much more perilous. All of the same questions and reasons not to do what you have done apply, but there's more. Very often, despite the best of intentions and armed with the hope that they will be able to make the payment tomorrow, the embarrassed (other) signer doesn't tell you that he or she has missed a loan payment or two. The result is a collector contacts you and wants payments, fees and your first-born child. Also, by then your credit history may have taken a significant negative hit that will remain with you for seven years.
So, although I might have cautioned you about making a personal loan, you could have done much worse. Here's my answer to your question about using your emergency stash. In normal times, I'd say no. In our current economy and job market, I say no way! That $10,000 is a lot of money and a commendable start on an emergency fund, but it isn't enough. What you need to work on is building an emergency fund that can cover six to 12 months of expenses. Until you get to that goal, you will remain vulnerable to the effects of a serious illness, job loss or other form of "income interruptus"! Someone has to work extra hard to repay this personal loan, and it looks like it may have to be you.
I suggest that you begin to pay down as much of the balance each month as you can until it is paid. If you pay $320 per month for 24 months, the balance will be gone, and you will have learned a valuable lesson for the extremely reasonable price of about $700 in interest charges and, of course, the $7,000.
For my readers who may be asked by a friend, loved one or relative for a personal loan, here are four ways to approach it:
- Lend only what you can afford without borrowing and expect to never see it again.
- Never co-sign a loan. If the bank won't lend, neither should you.
- Do not put your own finances at risk to help a loved one. Sympathy, emotional support and being there as a friend are worth more than money.
- If you have already made a loan and haven't been paid back, and you value the relationship with the person, let it go. Who knows, maybe you'll get a nice surprise when you least expect it.
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