New Micro-Investment

While considering my current short-term investment options, I was inspired by a couple of things, especially the existence of the micro-lending market, to come up with a plan with my younger brother. This plan would benefit us both if everything works out in both our favors.

The plan is this: My brother decided to go back to school for the first time in years, and small signs exist around that demonstrates his initial commitment. And although, he's also swimming in insurmountable debt, he's also beginning to demonstrate a bit of fiscal responsibility to be on his way to financially fitness again.

His biggest revolving account balance is $7K, and here's the kicker: with a *35%* APR! Even more frightening is that the monthly periodic interest as shown on the statement seems lower than what it should actually be-- and we have no idea if, in the future, that gives the creditor the ability or right to really screw my brother big-time or what else. Well, we decided we don't care to find out.

Here were the terms of the agreement: I help pay off the $7K today. He agrees to pay me back at a 5%-10% annualized rate, depending on factors, including: 1) demonstration of being more fiscally disciplined with his own budget and ability to pay off two other substantially smaller revolving credit accounts and another relative, and 2) proof of very positive status updates and proof from classes-- nothing less than a B+-- on full course load as defined by his school district. (Cognitively speaking, he's smarter than I am. Everyone knows he can do it. He's just lazy. Even he realizes this.)

If none of these terms are met, then at minimum, he owes me the principal back + 10% annual.

If he doesn't pay me back 6 months after the mutually-agreed initial pay-back period, I'll pursue wage garnishment / debt collection against him. There is no way I will not ask for this money back this time around; it's made clear to him; and he understands. If it ever gets to that point, I'll be nice: I'll only ask back principal + 10% + lost wages in pursuing him. :)

Meanwhile, I've just found a great way to secure a 10% annual investment without worrying about market volatility.

Even at the 10% interest rate for $7K, I'll be saving him $1750 a year. Unbelievable.

Personally, the worst that could happen is that I end up with a 5% return, which is equivalent to money-market / 10-year note rates. But I do end up helping out someone in need.

UPDATE:

Loan balance is now at $10K since we added a 2nd, and final, charge account that had a 28% killer APR.

Obviously, giving my brother this loan means, to some, I fail to meet this year's short-term cash reserve goal of being in the $40K-$50K range. However, if I consider this loan as an unsecured, promissory note, just as I already do with about $2K that MT owes me personally, then in another sense, I can count it as part of my net worth. It's a compromise that seems reasonable-- it's not like I just took $10K and dropped it on a fancy international vacation or an always-depreciating and unneeded new sports car.