Lending to in-laws - Smart move or dangerous move

[Eric Burgh]

So I'm in a jam with my wife and I on opposite ends - my parents are buying a new place and need to borrow money ($120k).  Good relationship with us, they have excellent credit, financially responsible, 3 houses paid off - 2 of which are rental properties with steady tenants and 1 primary residence which I would update their bathroom and would go on the market in spring and likely sell for $400k.  They are amateur investors so asked my wife and I if we would lend them as much as we could and they would give us ~4% interest, rather than give it to the bank (sounds good/generous to me to keep the money in the family).

I have some available cash which I'm letting them borrow, but the majority would be my wife's money which she is saving for our house which we buy together in a year.  Right now her money is sitting in the stock market and I have no idea what return she is getting.

Wife's answer was an immediate no, based on principle and not numbers (her return % on stock investment).  I feel a bit insulted and sure my parents will as well, but wondering is this something to try to talk her into or is it too close to home and leave it be.

[JD Martin]

Well, it depends on whether or not you want to be divorced.

On the surface, I side with your wife for the following reasons:

1. Unless you are getting first position on the new place - ie, you could foreclose if they don't pay it back - that interest rate sucks on a personal loan.

2. You already have the money earmarked for your own house, while your parents own 3 houses already.

3. Your parents could, and should, just take a loan against one of their own houses that is free and clear rather than asking you to bear the burden.

4. Anything could go wrong wherein their house doesn't sell, or takes forever to sell, and they won't have any real press to do anything about it since they are using someone else's money.

5. People who own hundreds of thousands of dollars of real estate, free and clear, asking to borrow money from their children, seems obnoxious to me.

Frankly, I see a hundred ways this could go wrong. It will ruin the relationship you have with your wife if it does. I never loan money to family unless I can consider it a gift. Can you gift your parents $120k?