‘Dad, will you lend me $250.00?’ This from my eleven year old son.
‘What for?’
‘So I can buy V-Bucks for Fortnite on my Playstation!’
‘I’ll lend it to you,’ his older sister chimes in, flexing her financial muscles. ‘I charge two percent interest a month.’
At this point, I elect not to launch into the questionable morals of charging your eleven year old brother interest. That is a lesson for another day It’s all little more than friendly banter at this point. I bite my tongue and wait to see how it plays out.
‘Done!’ says my son who can already feel money in his hand.
Time to step in before this interaction ends in tears. ‘Hold on,’ I say. ‘How are you going to pay back $250.00? Ask yourself, can you pay what is owed?’
My son grins and shrugs. He and I both know he has not even considered repaying the loan. I should explain that money runs through his hands like water. He saves because I make him – but he hasn’t understood the value yet.
I turn to my daughter and say, ‘You’re going to want some sort of security on that loan.’
She looks puzzled so I explain, ‘What if your brother can’t pay the loan back?’
She ponders this for a moment. ‘I’ll charge him even more interest until he can pay what is owed.’
‘Forget the interest!’ I laugh and shake my head, ‘You won’t even get your $250.00 back. That money is in the wind.’
Silence as the two siblings stare each other down each with a lopsided grin on their faces.
‘How about this?’ I suggest. ‘Take your brother’s Playstation as security. If he doesn’t pay you back, he has to give you the Playstation.’
‘What!’ my son is incredulous but his sister’s eyes light up.
‘Yes!’ she exclaims. I can sell it on ebay to get my money back.
Suddenly, my son is less keen. He had to smash up a patio as part of a landscaping project and lift a nearly a ton of rubble into a skip to earn the money for that Playstation. This is too big a prize to lose if he can’t pay what is owed – and, in his heart, he knows he can’t.
‘Why should she get my Playstation?’ he asks.
‘That’s how loans work,’ I explain. ‘When I take out a loan, I have to offer the bank security, like our house. That way, if I don’t pay them back, they can take my stuff and sell it to get their money back.’
‘But what if they sell it for more than you owe?’
‘Well, in that case, they will give you back whatever is left over. But, trust me, it won’t be much.’
More pondering. And staring. And grinning.
‘So, how about it?’ I ask. ‘Do you still want that loan from your sister?’
He grins and shakes his head. ‘Nah! I don’t really need the money.’
We are still all smiling and the game is over.
There were two lessons here.
First, for the lender; don’t lend money unless you are sure the borrower is able to repay you. As a lender, you have a duty to make sure the borrower understands, and can bear, the cost of this loan if they are unable to pay what is owed as originally planned.
Second, the borrower needs to understand that they have a Biblical and moral obligation to pay what is owed.
7 Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. 8 Let no debt remain outstanding, except the continuing debt to love one another, for whoever has loved others has fulfilled the law.
Romans 13:7-8
I would rather teach my children to assess risk properly, both as a borrower and a lender, in their early teens than see them learn this lesson the hard way as adults.
A story my mother told me many years ago about an ex-colleague of hers still haunts me. Recently retired, he received his pension package as a lump-sum payment. This was his nest-egg; the money that would see him and his wife through their autumn years.
When his nephew approached him with plans to open a restaurant, he became excited. He could help out a family member and ensure that his money was in the care of someone he trusted. As a silent partner in the business, he would be guaranteed an income for years to come and who knew what the business could grow into!
A 50/50 partnership seemed fair. He put in all of the money and his nephew would run the business and do all of the work. Sadly, things did not work out as planned. In a matter of months, the business burned through all his cash and ultimately failed. By the time his nephew came clean and told him how bad things were, it was too late. The restaurant closed, leaving the man and his wife destitute.
His nephew couldn’t help or make things right. He had no money of his own, which is why he had needed the loan in the first place. How bad must that young man have felt? He didn’t set out to cheat his uncle out of his life’s savings. What a dreadful position to find yourself in.
What my mom’s colleague failed to do was assess the risk. His nephew may have been a great chef but that did not automatically make him a great businessman. Furthermore, he had no means to pay back the loan if things went wrong. Neither of these men had any recourse and all was lost.