The Irresponsibility Of Borrowing Money To Borrow More Money
If you want to know what’s wrong with people’s personal finances, just observe those who are willing to borrow money in order to borrow more money! One example is using a credit card you can’t pay off in full each month, for a downpayment on a car. Since the limit for credit card use for buying at the car dealership is usually $3,000, and given most downpayments on vehicles range from $0 to $3,000 to buy or lease, using the credit card is a tantalizing proposition.
Forget the fact that these car buyers don’t make 10X the value of the car in annual salary. They can’t even pay cash for the car or come up with even 10% of the value of the car as a downpayment! Look, I know more than anyone how alluring it is to buy a nice car. I used to be a car addict with 7 different cars in as many years. It’s just irresponsibile of consumers to use their credit card for a downpayment when they don’t have a healthy savings account balance to match the entire value of the car before purchase.
BANK OF MOM AND DAD FOR REAL ESTATE
The other common example is college grads borrowing a housing downpayment from their parents. I can live with this, if you are paying your parents back with interest. What frustrated homebuyers fail to realize when buying in international cities such as San Francisco, Paris, Hong Kong, London, and New York is that they aren’t up against just the buyer, they are often up against the buyer’s bank account PLUS the bank account of mommy and daddy!
I see it time and time again at open houses where a 26 year old is checking out a house with his parents. He’s asking mommy where he should place the dining table, and daddy whether the big screen TV he’s going to get for Christmas will be able to comfortably fit in a particular nook. These grown kids are looking at properties valued between $600,000-$1,000,000 here in San Francisco. Not bad if you have parent’s willing to spend!
People wonder why housing prices haven’t gone down much at all in SF and NYC, and it’s because of the generational bank accounts that keep kids afloat.
The question is, do you ever pay your parents back? I mean, if you’re 30 years old and still living off the parents, doesn’t that do something to one’s pride and self-esteem?
BORROW TO BORROW FOR EXPERIENCES?
Borrowing money you don’t have to be able to borrow money on a depreciating asset like a car is one of the dumbest things you can do for your personal finances. Most “things” depreciate, which begs the question, “What about borrowing money for an experience you can’t afford?”
The cruise for two we took last year cost about $10,000 total, including air fare. We had to put a $2,000 deposit to secure our suite for 12 nights. This is where the temptation to borrow the $2,000 arises and infiltrates your personal finances like Team 6 getting Osama. I plopped down my credit card of course, because I wasn’t about to mail a check. I can see the temptation of just paying the minimum, but even with my good credit, my credit card interest rate is 10%!
Thirty days later, I paid off the balance and a month before we set sail, I paid off the remaining balance. If I could not pay for the $2,000 deposit after 30 days interest free, I would not have gone on the cruise. I do believe good experiences appreciate over time. However, if you are to borrow money, you better hope that your good memories appreciate faster than the size of your debt balance!
JUST SAY NO TO BORROWING WHAT YOU DON’T HAVE
It doesn’t matter whether you are buying things or experiences on debt. If you can’t afford to pay for the downpayment yourself, you certainly should not be borrowing money to borrow more money. You cannot afford it, just like I can’t afford to fly business class and drive a Lamborghini.
Tell yourself you are poor. Tell yourself you are unhealthy. Tell yourself you are undeserving because you did poorly in school, ate too much, and don’t work hard enough. Whatever the case may be, tell yourself that you don’t deserve these things or experiences simply because it is the truth. Your personal finances will thank you down the road.
If you’re looking for a rewards credit card, I happily recommend the Citi ThankYou® Preferred credit card. It’s great for everyday use and has the most comprehensive rewards program around. Furthermore, Citibank is everywhere in the world. I’ve been a card holder for the past eight years and plan to continue being a cardholder for the rest of my credit card using days!
Photo: Swans with their babies at the Palace Of Fine Arts, San Francisco, SD, 2012.
Regards,
Sam
You borrow for investments (possibly inclduing an education) and very serious emergencies only.
Anything else is a stupid and conscious choice to worsen your financial situation.
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I agree that we need to borrow for investments that will pay them selves back through time. Borrowing for a car is absolutely stupid. I had a friend who purchased a condo, who makes less than me (he fessed up..dummy!), yet has a more expensive condo. Never made any sense until he admitted its not truly his condo, its a family condo that he lives in, and his parents dropped $60k in down payment. Then it make perfect sense.
BTW….US Open in your hometown @ The Olympic. Quite the course huh? A lot of bush, tight fairways, and lightning fast greens.
Have you ever had the chance to play?
Cheers.
Eddie
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Financial Samurai Reply:
June 14th, 2012 at 3:18 pm
Hey Eddie, does your friend have no shame in bank of mom and dad buying his more expensive condo for him? How old is he and how much do you think he makes? Is it a he, or a she?
Yep, the US Open kicked off today. It’s a brutal course which I’ve played several times before. Going to check out the action tomorrow!
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It sounds ridiculous to borrow money to borrow more money, but people do it ALL the time. And I seriously doubt the kids who get a downpayment on their house by mom and dad will pay their parents back. But what they might have to do instead is tolerate a lot of unannounced visits from the ‘rents if they live within driving distance.
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Financial Samurai Reply:
June 14th, 2012 at 3:18 pm
Hahaha, that would be intolerable! No thanks!
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“The question is, do you ever pay your parents back? I mean, if you’re 30 years old and still living off the parents, doesn’t that do something to one’s pride and self-esteem?”
Shouldn’t this also be the same for all sorts of help including government subsidies? Unfortunately I personally know many that just take without any sense of gratitude (of course, we don’t talk about such things when spending time together). It gets to me sometimes.
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Financial Samurai Reply:
June 14th, 2012 at 3:19 pm
I’d say, go ahead and take government welfare if it’s there for you. But, if you take it, you better not start protesting against the very people who are providing you these subsidies! A thank you note would be more appropriate!
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These days the only borrowing I do is for real estate. I took out a car loan a few cars ago and it was a pain. It took forever to pay off and I hated sending the monthly payment to the finance company. My parents helped out when I purchased my first home. I didn’t have the big chunk saved up and they didn’t want me to borrow from my 401k. I’ve paid back since.
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Financial Samurai Reply:
June 14th, 2012 at 3:19 pm
Good stuff Joe. Paying back the rents is the honorable thing to do!
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I agree, I would never borrow for a vacation. There are times when borrowing makes a lot of sense, when interest rates are this low and you can utilize the cash in better ways.
I did use my line of credit to buy my townhouse for the down payment. At the time, I was renting out my home and downsized to a townhouse. I used the rent to pay off the loan within 10 months.
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Financial Samurai Reply:
June 14th, 2012 at 3:20 pm
Ahhh, to be able to buy property now whose rent can pay off the mortgage in 10 months. Unheard of!
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krantcents Reply:
June 14th, 2012 at 3:30 pm
I think you misunderstood me. I paid off my loan that I used as a down payment on the townhouse.
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Financial Samurai Reply:
June 14th, 2012 at 3:41 pm
Oh, got it now.
I don’t think I’ve ever borrowed money to borrow more money. I guess I’d maybe do it if I knew of a limited-time investment opportunity that was a sure winner. Otherwise I am content with the status quo of eliminating debt rather than creating it.
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Financial Samurai Reply:
June 13th, 2012 at 8:43 am
No such thing as a limited-time sure win John!
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Samurai, I absolutely agree with you here. There is no bigger red flag about people’s knowledge of personal finance than casual use of credit. All those store credit cards just make me cringe–what sort of investment do you get at Target, or Sears, or Best Buy?
I will say that as an exception I did, on the surface, fulfill one of your scenarios. I did pay for a new car last February with my credit card. In fact, I charged as much as I could! (They would not let me pay in full on the card) This is because as the automotive industry (finally!) sized to demand in 2009, the price of used cars vs. new cars was just as crazy as the yield curve. I paid the rest with cash, but I got 1% back on my charge, and then like you I paid it off in full when the bill came. This gave me $50 back on $5,000 charged. Also, this new car cost $3,000 more than a comparable used car with 60,000 miles on it. So, I am getting those first miles–the most expensive in terms of depreciation– at 20 cents per mile. It was crazy, and I pounced on it before they came to their senses.
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JT Reply:
June 13th, 2012 at 8:37 am
I think you mean 5 cents per mile, which is consistent with what I see in the used car market, as well. Glad to see more people willing to ditch conventional wisdom when it would lead them off a cliff, and that’s exactly what used cars are doing to people right now.
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Matt Reply:
June 13th, 2012 at 8:43 am
Jt,
Yes, 5 cents–that’s something to celebrate! Prrofreading on a tablet is not as easy as it should be…
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My parents gave me a couple grand to help with the down payment on my home. I had every intention of paying them back but they said it was a gift. It wasn’t a significant amount and I’ve since super accelerated the payoff so I think I used their gift wisely, plus I donated a kidney to my dad so I guess he owed me one lol :)
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Financial Samurai Reply:
June 13th, 2012 at 8:42 am
Hahaha…. yes, donating a kidney to your dad sounds like a good trade for him for a couple grand!
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We are looking to borrow money from my in-laws for a downpayment for a house (around $300k range). When this happens, we plan on paying them back plus interest within 5 years. They told us they didn’t want interest, but we’ll see. This situation hasn’t happened yet.
We had $30k saved up for our house down payment before our current situation sort of wiped out a lot of it, so my in-laws know we weren’t just being frivolous with our money and are serious about saving. I think intent is important.
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Financial Samurai Reply:
June 13th, 2012 at 8:45 am
Intent is important, however if one accidentally runs over someone with their car, there are still consequences.
Will you feel OK being in debt to your inlaws for tens of thousands of dollars on top of the ~$240,000 in mortgage you’ll have to pay? For me, it would weigh on my soul heavily, especially if I couldn’t pay it back right away. Your next 5 years might be mental torture, always feeling indebted to the inlaws.
If they were your own flesh and blood, maybe you’d feel differently though…
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Kris Reply:
June 13th, 2012 at 9:52 am
Actually, it would feel horrible if we owed my parents money because they like to have strings attached to money. My husband’s parents – as much as i don’t always get along with them – are very pragmatic about those types of things. To them, us borrowing money is a simple business transaction that we’d conduct. To my parents, money is a method of control. My brother used to borrow money from my parents, and they would either hold it over his head, lecturing him on the evils of his ways, or they would tell him he owed them xyz because they helped him. Money is a huge source of problems in my family, which is why I would never borrow money from them even though they have a lot to spare.
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Financial Samurai Reply:
June 13th, 2012 at 10:21 am
Just read your post Kris. Please don’t borrow to borrow to buy a bigger house when you already have a townhouse while in your current financial situation. A 2/1 townhouse for a family of 3 is good!
I would really like to hear your perspective as to why you feel you must leverage more while only having what you have saved.
I can fully relate to the part about asking mommy and daddy to fund their housing down payment. This was the exact situation with my sister-in-law and her husband. They had no problem sticking their hands out for a hand-out and I just thought how irresponsible to be asking for money still when they were almost 30 years old! Its so sad really.
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Financial Samurai Reply:
June 13th, 2012 at 10:44 am
Did they pay them back? I’m surprised your brother, as a 30 year old man would have the courage to ask. I would do everything I could to be a man and provide for my family at 30 and not go back to the parental well.
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Jacob @ iHeartBudgets Reply:
June 13th, 2012 at 4:39 pm
I think the whole “be a man” thing is lost on my generation. It’s really sad. Dudes go out of their way to take on the least amount of responsibility possible with no shame.
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Financial Samurai Reply:
June 14th, 2012 at 3:20 pm
Where is the honor?
Debt and the Girl Reply:
June 19th, 2012 at 7:41 am
I honestly don’t know. But from what I have seen in the past from them, I
would be very surprised if they paid anything back. My sister-in-law
especially is not the most stand-up of people. I just try and tell my myself that
she will never know what it feels like to feel really independent. It really
is the best feeling in the world.
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I have never borrowed money to borrow more money. I feel good about this. I feel like if you borrow money from your parents (and not pay them back with interest like any other loan) or get sizable cash gifts from your parents you lose all self-responsibility. A lot of parents, I would venture to say, want their kids to have nice things like they do – the luxury cars, the fancy condos, the expensive clothes – to keep up appearances, yet the kids would never be able to afford those things themselves. And what incentive would they have to go out and make that money in order to afford those things themselves? Zero. I like being self-made; I get a lot of satisfaction out of it along with a drive to succeed and meet my financial goals.
Mr. Everyday Dollar
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Interesting post Sam. I think most people that read this site are conservative with their finances and not the types to borrow money to borrow more money. However, I can’t say the same thing about our government which is very much in debt and continues to dig itself deeper in to debt. If our Uncle Sam doesn’t set a good example of fiscal reponsibility how can we as a society expect anything more from all citizens? Do you feel that the institutions that lend money should excercise more control over who can borrow and how much they can borrow so that an individual can not borrow beyond their means? Would this be an encroachment on our civil liberties to not live beyond our means?
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Financial Samurai Reply:
June 14th, 2012 at 3:21 pm
Exactly. How the hell can we take the gov’t seriously at all if they themselves are in massive debt? Hypocrisy.
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I feel like you are writing this to my sister, who now wants to buy a house and needs mom and dad to help her with the down payment. They’d have to take out a personal line of credit to help her do this, and the kid has 60+ thousand dollars of student loan debt. It scares me a little. That said, once I wrote a $20K check from my credit card, so I know how dumb it is to borrow in order to lend.
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Financial Samurai Reply:
June 14th, 2012 at 3:22 pm
When you ask your sister, “Why not just save enough on your own to be able to afford the down payment?”, what does she say?
How about, “Didn’t mom and dad give us enough already? Don’t you feel bad for asking them to borrow to give you money to borrow more money?”
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this is a terribly stupid idea, and that’s basically all there is to it.
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I’ve borrowed money from family, but only with a guaranteed payback plan with a timeline (less than 6 months). I’ve never borrowed on a car and never will. EVER. I also don’t buy new, no matter how “good of a deal” it seems to be, I will always SAVE THOUSANDS buying 5 years or older, private sale. I’ve proven this over and over, as well as my brother who has bought 50+ cars on craigslist (and sold most for a profit). Borrowing to borrow, especially on a depreciating asset, seems like the triple threat of horrible ideas. It’s like, “how can I waste the most amount of money possible while taking on the most liability in one decision.” No thank you.
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This is a recipe for disaster. If you can’t afford to make the down payment in the first place you definitely shouldn’t be taking out another loan to do it. The fact you had to take out the main loan should make you stop and reconsider and then if you have to take out a second loan to get the first one you should have some massive warning sirens going off in your head telling you to stop.
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Sam, message is loud and clear. Don’t spend money you don’t have to please those who don’t care. Unfortunately, we are in minority. Credit card companies love those who are eternally working on their hedonic treadmill.
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Hey Sam,
I did borrow half of my share for the downpayment from my girlfriend, as I did not have the cash available and I didn’t want to liquidate a big part of my retirement funds for this purpose.
She got the rest of my paycheck for a few paychecks after that until she was paid back. She still jabs me about it from time to time, but it’s OK, I can jab her about other things too. ;)
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Financial Samurai Reply:
June 14th, 2012 at 3:23 pm
Nothing wrong with a suga gfriend! Just make sure you make an honest women out of her or else she might kick your ass!
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I had to hold myself back from laughing hysterically on this post you wrote. You’re not a fan of borrowing money to borrow money to borrow….yada, yada.yada? And yet you have no qualms about the enormous borrowed debt Obama has put this country in and you advocate collecting UI benefits and whatever else the govt doles out, knowing that the government has to borrow said money in order to pay out these benefits? With a President setting examples like this to the young people, is it any wonder you youngin’s borrow endlessly and needlessly from your own parents? How’s that being health-insured up to the age of 27 Obama made in to law (hopefully to be repealed soon) working out for you guys?
Oh, and can’t pay back those govt backed student loans? What a pity. Obamama will wipe them out for you too. Don’t worry.
You’re a bit hypocritical, dontcha think? Duh?
Don’t respond to me. I’m too busy LMBFAO.
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Jerry Curl Reply:
June 14th, 2012 at 3:16 pm
So long as you pay your taxes, I’m sure Sam is just laughing at you for your hysteria!
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I love all the self-righteous comments flowing through this comment stream. It’s as though no one in this thread has ever borrowed a dime from someone else. Borrowing is borrowing, whether people borrow and then pay their balance in full to avoid interest, or whether they know they may not be able to pay their debts off in full. People are free to borrow as they may feel as long as they understand the consequences for their actions. It doesn’t make them stupid to me. Irresponsible, maybe?
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Financial Samurai Reply:
June 15th, 2012 at 12:16 am
I don’t think all borrowing is the same at all. To borrow money to borrow more money on a non-survival item is irresponsible. That said, everybody can do whatever they want.
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I believe it, the bank of mom and dad helps to fund more than 50% of down – payments in CA. I have had an instance where borrowing to borrow was brilliant. I paid my college tuition on a rewards card, then reimbursed myself with a student loan I was taking out anyway. It was a very easy $200, every semester.
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The bank of mom and dad never really contributed directly to anything. We had to pay for our way, but we do have family properties for vacations, etc. I wonder if that counts?
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I was one of those people who borrowed money in order to get more and borrow more. I think I did it all. However, from the positive point of view – I learned from it (the hard way), I know better now. Sometimes you have to do it yourself in order to understand. :)
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Financial Samurai Reply:
June 16th, 2012 at 1:28 pm
Aloysa, what did you use the borrowed money to buy?
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