When someone asks for a loan.

thSome very interesting reader comments appeared on my April 6 post, especially as regards grown sons and daughters who expect help with down payments and furnishings.

“Just got an email from my stepson who wants us to co-sign on an FHA home loan because they don’t have enough income to qualify for the loan,” wrote Kandace.

She hasn’t said “no” yet, but she will. But she knows that won’t be the end of it.

“Then they will likely want us to co-sign on an apartment, but I’m not comfortable with that either. I’m thinking about what I would be willing to give – or lose – financially. It will probably be an amount that helps get them (he, his wife and their two kids), into an apartment. But no co-signing for me.”

Not everyone was able to make that kind of call – at least initially.

 

Cindy Brick responded with, “DON’T DO IT, DON’T DO IT, DON’T DO IT” (emphasis in original). She and her husband co-signed a student loan that wound up becoming their problem, rather than their daughter’s. They’ve been paying it for a year because, despite their repeated requests, DD hasn’t made a move to take responsibility herself.

“Would we ever co-sign on anything ever again for her? I suspect you already know the answer to that question,” Brick concluded.

A reader named Amanda believes that “the only place parents (should) help a kid with housing expenses is when the kid lives in the parents’ house.” Kate Nelson wrote that “if I had ever asked to borrow from my parents they would have laughed in my face. … they made it clear that they were not going to finance our lifestyle (or lack thereof).”

I’ve loaned money to friends and family alike, and I’m still owed quite a bit. That’s why my personal credo jibes with Kandace’s: Never lend more than you can afford to lose.

 

So many ways to say “no”

What would you do if someone hit you up for money tomorrow? Being blindsided is never fun, especially if there’s a close or even familial relationship (more on that in a minute). You may be a compassionate person who wants to help a buddy or a brother.

Just be sure to save a little compassion for your own finances. Specifically, do not destroy your budget so that someone else’s life will be easier.

One way to protect yourself is to pinky-swear-promise yourself – right here, right now – that you will never react with an automatic “yes.” If you’re not in a position to lend money or cosign a loan, don’t do it. Instead, use one of these scripts:

  • “No.” (As they say, this is a complete sentence.)
  • “That’s not in my budget. Sorry.”
  • “I lent you money for snow tires and you haven’t made a single repayment. I can’t lend any more. Sorry.”
  • “I can’t help you financially. What I can do is help you create a workable budget or send you some info on budgeting tools like Mint or PowerWallet. Oh, and I’d also be glad to lend you some of my personal finance books and tell you about some great PF websites.” (Hint: You probably won’t get taken up on this very often.)
  • “Let me go home and check my finances to see if it’s possible. I’ll let you know tonight or tomorrow.” (Useful when, without warning, a cousin or a pal blurts out, “Hey, I need $300.” Follow up with a “not in my budget, sorry” e-mail that night or the next morning.)

This may never stop being difficult, by the way. If you’re lucky you’ll develop a nice thick skin. For some of us, however, money talk will always be fraught.

 

But we’re faaaamily

The stakes are considerably higher if this person is a relative. Same principle applies, however: Put on your own oxygen mask first.

Relatives may also feel justified in second-guessing your decision because relatives. Suppose this sister, cousin or (heaven forbid) parent won’t quit nagging, calling, texting, e-mailing, private-messaging or carrier-pigeoning the plea for dough? Here’s another script: “As I said, I can’t lend you money. I will not discuss this further. Unless we can talk about something else, this conversation has to be over.”

Then make it be over. Walk out of the room. Block the person’s e-mail/phone number. Unfriend him or her. And adjust that oxygen mask, because it’s going to be a bumpy ride.

As I said, I’m owed quite a bit of cash. Pretty sure that these folks really mean to get it back to me, but they just can’t right now. Although, come to think of it, I’ve read their Facebook postings about day trips and meals out, and seen photos of fabulous makeup and hair-colorings.

Short form: I doubt I’ll ever see the money, and that has to be okay. What it also has to be is an object lesson. As in, it really is necessary to put on your oxygen mask first. In an era where retirement planning is increasingly left to employees, handing out loans left and right is tantamount to financial seppuku.

Thus I have resolved to stop lending money. Fortunately, no one has asked lately.

 

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44 thoughts on “When someone asks for a loan.”

  1. Donna, thanks for such a timely follow-up post. As tax deadlines approach I imagine there will be an uptick in pleas to borrow – for help covering their taxes due and/or to tap into my refund. Note to self: been burned before so stick to the script, “No.”

    Reply
  2. Tough…tough …. subject. I am part of the “sandwich generation” that has kids in college and folks that are aging. So we get it from both sides…the kids and the old folks… A “friend” was notified by his parents that they had not paid the real estate taxes until a notice was sent that their home was going to be in the “Tax Auction” which would have immediately voided their reverse mortgage and precipitated a “demand letter”. He immediately called the County and was told the amount due WITH penalties and interest. He then sent off a check in access of $3K to bring them up to date. This was in August 2015…. and no mention has been made of the “debt”. Recently he received a “thank you card” for all he does for his folks with $50 in gift cards from them. He is perplexed, and why wouldn’t he be?…..AND taxes are due again in June…What advice should I give him? Thanks once more for the article…

    Reply
    • I’d gently suggest going over their budget (if one exists) to look for ways to build an annual tax fund.

      Note also that trouble managing money can be an indicator of dementia, so a medical checkup would be a good idea. I wish your friend luck, because he’s going to need it.

      Reply
      • If the elderly parents really cant afford to stay in their homes because of taxes there may be state assistance available. The house may need to be sold and an apartment paid for from the proceeds of the home. Your friend needs a power of attorney ASAP to truly help their parents manage living expenses. Keep copies of all the money spent for parental support this information could prove helpful in the future for Medicaid.

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        • In this case, the existence of a reverse mortgage would complicate things. But yes, the son should investigate all available options. Some places have an elder ombudsman or perhaps the department of health and social services (or human services, or whatever it’s called in that state) could offer some possibilities.

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    • I would advise that he also check into the status of the home insurance. We found, after my father-in-law died, that all insurances, all taxes, and all bills were in arrears. Tax returns hadn’t been filed for five years. They had the money but FIL was losing his grip and MIL was too busy trying to hold things together AND she had, we discovered 6 months later, a brain tumor.

      When one thing starts to slide it is a cinch that other things are sliding too. Good luck.

      Reply
  3. I’ve only loaned money once. A young family friend got himself in some sort of bind to the tune of $1000. I didn’t ask what, didn’t matter to me. He immediately asked for a piece of paper so that he could write an IOU. I told him that I shouldn’t need one unless his word was no good. He was absolutely astounded that I would let him walk with a grand with nothing to back it up except his word. He told me when he would have the money….a very short schedule which would have undoubtedly left him in the hole again. I suggested paying half and working off half so he wouldn’t get behind right away.

    I don’t recommend this approach for everyone, but this young man dearly needed someone to believe in him. I think his family had all but washed their hands. True to his word, I got a bunch of things done around the yard AND I think most of the cash. I honestly didn’t keep close track. He was so intent on making his word good. He was standing just a little straighter when he was done. 🙂

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  4. I have a friend who lent/gave an adult child money for a down payment on a house. And then assisted with the monthly mortgage payments for years. Her name is on the title. And now adult child with 2 jobs and an employed live in love expects her to continue to contribute even more monthly ($600) because she wants to move. When asked why cash assistance was needed on a continual basis, it is because the credit card they use for food is so high. Food as in eating out because they are tired at the end of the day/evening and can’t be bothered with cooking and preparing food. The credit card bill is about $600 – 1200 per month for 2 people. One of the second jobs is as a manager of a restaurant. My friend is pushing 70 and has gone back to work.

    Reply
    • That sounds unreasonable to me — and to you, too, I bet.

      Is it the mother who wants to move or the child? Not clear to me. If it’s the mom, then I think it’s time for a come-to-Jesus talk, e.g., “In six months I will have moved to my own apartment and cannot contribute any more to the mortgage. That gives you half a year to zero out your credit cards and learn a few cooking basics.”

      Wow. I wish her luck.

      Reply
  5. Fantastic post, thank you!

    We are always happy to help people get themselves out of difficult financial situations, and will joyfully share our time, hard work, and connections to resources whenever someone asks, but we do not perpetuate helplessness and would certainly never add to anyone’s troubles by making them beholden to us.

    Loved ones in crisis will always find support and help at our house, but if it’s cash or cosigners they want, they know to look elsewhere.

    Reply
    • Agreed.

      The fact that some people expect parents to help with monthly payments is what really startled me. What happens if your parents’ finances go south? Or if your home needs serious repairs? Or if one of you loses his/her job and suddenly the monthly payments are even more unaffordable? Or or or or or or…. There are just so many unknowns when it comes to homeownership.

      Looking forward to your post.

      Reply
    • Among people I know, parental help with the downpayment has been nearly universal, and in most cases the parents were helped by *their* parents and that’s why they have the means to help in the first place.

      In fact I’m pretty sure our loan officer gave us the directions on how to hide a parental loan, when we bought our house – get the deposit in before you apply for pre-approval, and get a letter from your folks saying it’s a gift(we didn’t get parental loans – my husband is a money hoarder since a young age and I got an actual cash gift from my family, not a secret loan.)

      I wonder what there is published out there in terms of intergenerational family wealth and home ownership. I’ve only seen articles about it in terms of racial wealth gaps, but I know parents having home equity is a big predictor of the next generation buying a house.

      We totally could afford the place, btw – we moved with our roomates and with them paying us rent instead of all of us paying our old landlord, we paid a lot extra on our mortgage every month the first few years.

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  6. Wow! These comments are somewhat shocking to me — both that someone would ask for a loan for something like a down payment they could not afford, and also that family members would fail to pay back a loan (even slowly).

    In my extended family, many loans have been made (some with official contracts signed, and I’ve been both the borrower and lender. I’ve also been pressed to accept loans from close friends but did not, although I REALLY appreciate knowing people have my back in emergencies.

    Every loan has been paid back, with the exception of about $80 I was owed (out of a total of $200) from someone who died within a couple years of the loan, and who was living in extreme financial hardship.

    I agree wholeheartedly — nobody can loan $$ that would put the lender in a financial hardship, or that they couldn’t afford to lose. However, if done properly, a family member can help another either in an emergency (think legal fees, car towing fees) or to save the borrower the high cost of interest. Often in our family, people might say, I can’t afford to give you $$ for your emergency car repair or last year of grad school, but I can afford to loan you $$ interest-free (and since interest rates are so low, the lender isn’t sacrificing too much). Even charging interest would at least let the interest $$ stay in the family instead of going to a credit card.

    Also, I live in a city where anyone self-employed has a very hard time renting an apartment (the city has onerous laws on landlords if they require security deposits, so they don’t like to do so), so it’s quite common that anyone self-employed, even making lots of $, would need a co-signer, so I guess it’s more common.

    For anyone who has not been paid back, I’d suggest politely reminding the borrower of the outstanding balance regularly (perhaps monthly, like any bill), and saying you could really use the $$ back yourself, even paid back in small increments, if that’s all they can afford.

    Reply
    • DF keeps a certain amount of cash on hand. He calls it “bail money,” and although fortunately he’s never had to bail out a relative he has bailed out friends. (I could also see its being used for towing/impound charges. So far, so good, though.)

      The bank we use is fairly close by, so if more were needed we could use debit cards. Here’s hoping that doesn’t have to happen. But if someone needed it, we could provide it.

      I’m not anti-lending. I’m just asking people to be very cautious indeed lest they wind up needing to borrow from someone else because their own loans haven’t been repaid.

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  7. I feel a little bad about this post, given that you’ve actively forgiven us money we were willing to repay. Twice — once that you offered to loan us. (So I guess that doesn’t count?)

    That said, as long as things keep at a steady pace, we should never need to ask ANYONE for money again — except the bank if/when we get a rental property.

    Reply
    • Yeah, but that was a wedding gift. So it doesn’t count. 🙂

      Other loans were made within my “What can I afford to lose?” framework — and as it turned out, I didn’t lose anything.

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  8. I am fully on board with Donna about just saying no… and it’s a bit hypocritically.

    I was loaned money by my parents three times. The first time 10,000 dollars for a period of roughly a month to buttress the amount in my savings account while getting a home loan. The second time they loaned me 45,000 to finish paying off my property, and the third time was more of a continuation of the second loan terms so that I was able to use the money from the sale of the first property as a down on the second property. Each time they did this by tapping a HELOC on their home.

    Each time it was the last resort to accomplish my goals.

    The money from the first loan was returned immediately and the second loan was paid down by 3 to 4 thousand dollars per month. I was very aggressive and actually sent my family a set of signed blank checks so that each month I could pay as much as I could, as quickly as possible.

    Now, I am just a year from having a fully paid for home, in one of the best areas of the country, based largely on my ability to tap their equity to make the change from one building to another during the lowest part of the housing crisis.

    I am deeply grateful for not just their ability, but also their willingness to help me. I believe it was primarily because I did not ask for money casually, not even as a child, while both of my siblings borrowed money they did not repay every few years. I believe my parents really looked at their chances of repayment and bet on me in a big way.

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  9. Perhaps I don’t know a lot of my friends that well but most of them have rarely asked their parents for anything. And if they did it was because it was a slow time at the restaurant and the tips they were earning wasn’t enough to cover rent. But in my case, I have had a sibling ask me to cosign on a student loan, knowing full well that I had 2x that amount that I was trying to pay off. There are times that I wonder what is in the heads of some people.

    Reply
    • “I wonder what is in the heads of some people.”

      Probably not a whole lot, except for this phrase: “Myneedsmyneedsmyneedsmyneedsmyneeds.”

      Could be a function of age, though, i.e., it’s all about the sibling’s finances and no one else’s need be considered because surely they’re making a ton of money by now.

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  10. We only have loaned money to people we know would pay it back or die trying, and even then, we only loaned what we could afford to lose. In college, I loaned $300 to a new work acquaintance so she could pay her rent while waiting for her first paycheck. She paid me back 6 hours after she was paid 3 weeks later. Over the last 15 years, my husband and I have loaned $20-$700 here and there for friends (family has never asked and friends haven’t either…we just saw a need and offered to fill it), and they’ve always paid us back.

    The longest term loan was 3 months for $700…we fronted a cruise ticket (ticket, taxes, and tips) for a friend who wanted to join us and she paid us back 2 weeks before the cruise since she was socking away $50 a week to do it. That cruise is next week and it’s going to be awesome!

    So we follow the advice to never loan more than you can afford to lose. But we also aren’t ever asked so that makes choosing to loan people money once in a while way easier and less awkward. If our friends or family ever need help, we’ll be there for them. In return, they would pay us back. It’s nice to have already weeded out the users from the equation (before they actually could “get” us too…life lessons learned from others do come in handy).

    Reply
    • “Life lessons learned from others do come in handy.”

      It’s like frozen yogurt: All of the pleasure, none of the guilt.

      Hope you guys have an amazing time on the cruise. Just think: No need to walk anybody’s pets or clean up after them, either. No freelance stuff to write. No blog to maintain. (And if you do any writing on the boat, I hope it’s short and sweet and doesn’t interfere unduly with your relaxation.)

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  11. I agree with what has been written here–you need to be able to afford to lose money and also trust the source to whom you are giving the money. Our “no” hasn’t quite been heard yet. We got an email last night with the details of their finances, current rentals available, and the gap for financial coverage. What the budget also lacked was current rent payment, moving expenses, and a deposit.

    Our response? Find an apartment that you can qualify to make the payment on. You may have to double up on bedrooms for a little while.

    We have said no in the past to these family members, but we also said “yes” when they lived in a house we owned for four years, and they paid rent four times. We were worried about the lives of our grandkids, so that’s why we let them stay. Our “yes” in the past probably wasn’t the best answer, but we were trying to be helpful and let them land on their feet. In hindsight, we were really enablers. But we had a house they could live in. However, co-signing so they can get an apartment is putting our credit at risk and taking something from us we aren’t willing to give.

    We’ve also sold the house they were living in, so that’s no longer an option.

    Reply
    • That is a very touchy situation, for sure. Your well-intentioned lenience in the past led them to believe that you could “afford” to let them slide. I’m glad you realize that signing for them will put your credit, as well as some/lots of your savings if they can’t make rent payments or damage the place.

      My unsolicited advice: Keep doing what you’re doing, i.e., be encouraging and practical and also keep the bank closed.

      Thanks for sharing your story.

      Reply
  12. I have a different kind of lending story. In my first marriage, my husband’s family expected that we would take a mortgage from his mother so that the interest would provide the MIL income. There was all this hoopla about win-win, save us money, yada etc.

    I didn’t want any part of it, but was overruled.

    I actively resented paying interest to my mother-in-law. The interest was market rate, no discount, because all family members were paying the same rate. I was told early and often what a huge favor I received.

    I wanted a mortgage from the bank.

    This family mortgage was an excuse to meddle in all manner of our financial life despite the fact that every payment was made on time. Comments about how poorly our money was spent i.e. vacations, a dinner out, nice shoes were endless because… we owed so much. We quickly learned to volunteer zero info.

    A bank would have left us in peace.

    When my first husband died young (43) and suddenly, I told the MIL that I was paying off the mortgage. MIL was lividly angry, saying I would not be able to make the payments on my own and if anything bad happened the bank would not bail me out. I hired an attorney to be certain I got out of that family loan completely. I happily got a bank mortgage and all has been well.

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  13. My In-laws were having problems with property tax on a fixed income and a couple times we were making up the shortfall. They sold their house and purchased an affordable house next door to where we are retiring (2 hours away from the rest of the family). I suspect that there are less complaints about the distance if there’s a little bit of financial incentive to visit now. We purposely keep our wants and needs quiet, so there is no perception that they are bankrolling our renovation.

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  14. Do you suppose there’s been a general (societal) change of expectations? By that, I mean when my parents were young & starting out (1950s), their first home was a garage converted to a studio apartment. Later, with 2 kids under 3 yrs., they “moved up” to an apartment in the projects. And they steadily continued to move up with time, experience and hard work to be comfortable in their retirement. My sister and BIL started out in a tiny, old 1 BR apartment, then “moved up” to a single wide mobile home before their 2nd child was born. They continued to move up over time, etc. It seems folks no longer feel they should have to start out very modestly? And also (sometimes) there are (perhaps) unrealistic expectations about what constitutes an “acceptable” lifestyle? In a true emergency, I agree it’s best not to loan what you wouldn’t simply give and never, ever co-sign anything. If for no other reason, because if you’re hit by a train tomorrow, where would that leave the other party?

    Reply
    • Amen to that observation. To be honest, I think it started with my generation (I’m 57). We wanted to start out with the car, the house, and the lifestyle that it took our parents thirty years to acquire. I think the expectations of the current generation has gotten worse.

      Reply
      • “We wanted to start out with the car, the house, and the lifestyle that it took our parents thirty years to acquire.”

        Hmmm. That definitely wasn’t true of me or the folks I knew. We had the hand-me-down furniture and the cheap meals and the old cars, assuming we’d eventually work our way up to better stuff.

        Maybe that’s because it was harder to get credit back then, or because the people I knew didn’t have high-paying jobs. YMMV.

        However, I do agree that expectations have grown more expensive. After all, there’s a lot more to want these days. Cellphones (let alone smartphones) didn’t exist when I was a young woman, and cable TV was just beginning to make itself known when I was in my 20s. Game systems, personal computers and other stuff that are now seen as basics were also unknown.

        While working on the “utilities” chapter of the book I found myself deeming Internet access a line item in the budget. Well, at least if you’re looking for work. But I find myself wondering how I ever got along without the Internet and a computer at home. As recently as 2001 our home had neither a computer nor Internet, but that was because I got my fill of both during the workday. When we moved to Chicago in 2002 I bought a desktop and, after quitting the job at the Tribune, signed up for Earthlink because I knew I needed to be able to pitch editors electronically. It was dial-up, though.

        While I wouldn’t want a new grad to live without Internet access, I do think that s/he ought to wait to get the biggest and best of everything. That waiting should encompass saving an emergency fund, starting a retirement plan (and budgeting a monthly contribution), and being able to pay cash for most other wants. Don’t go into debt to get a new phone, new game system or other smaller items. If you’re fortunate enough at 22 to have a car that runs decently, keep it (and add another budget line item: “replacement vehicle”); if not, then get a decent used car and take the shortest loan term you can work into your existing paycheck.

        Those peers who seem to have everything? Unless they’ve got generous parents/no student loans/super-great salaries, they’ve got something else you don’t see: consumer debt.

        (That thumping sound you hear is me getting down off my soapbox.)

        Thanks for reading, and for sharing your horror stories in the other comment.

        Reply
  15. Being a single mom with two kids has been hard on me but im never taking a loan from family. I borrowed $40 bucks from friends and repaid that but even that I was stressed about. I cant imagine having my mom /stepdad having to help me pay monthly! I have to pay my mom rent when I lived with her and never missed a payment! Even when I really wanted to ask for an extension I never did cause I didn’t want her to get on my case about it. When my kids get over they can expect help from me. Not in a financial way but like you said im trying to teach them practical skills such as budgeting ,etc.

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  16. I had to stop lending years ago because I too made the mistake of lending, and even borrowing to lend, then learning the hard way that quite often the family lender is the last paid back. If ever paid back, that is.

    Our situation now? Though we make good incomes, not fixing the problem at the source (if I could have) means that my family is a regular monthly drain. So we simply cannot afford to lend, even if I did want to, in most cases. There are a select few, friends, mostly, who I would trust with any amount of money because their integrity is unimpeachable. They would hold a loan, especially from a friend who trusts them, to be a very high priority, so they’d do everything in their power to repay on an agreed schedule. A shame that can’t be said for more people.

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  17. “…we do not perpetuate helplessness” and “never add to anyone’s troubles by making them beholden to us”.
    Golden words, Elizabeth Vega!
    Great topic, Donna Freedman!

    Reply
    • Thank you, Diane!

      It IS a great topic, and I’m glad Donna wrote about it. Having thought about this and discussed our views beforehand has allowed my husband and me to position ourselves well on the rare occasions when requests have been made. We are happy to report that we have been able to assist our loved ones without becoming their banks, and are glad we felt prepared with our responses!

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  18. I’m so sorry that I’m so late to the game because I am absolutely passionate about this subject. I think the absolute prize for chutzpah goes to the family of a co-worker. She was talking to her uncle and mentioned that her widowed mother, the man’s sister, was contemplating selling her house. He then enthusiastically stated that he supported the idea because he could use his half of he proceeds from the sale. She was absolutely flabbergasted and asked him why on earth he thought that her mom would give him half the proceeds from the sale of her house. His response was simply, “Faaamily!”.

    My uncle callously did the same thing to my grandparents when my mother told him they were thinking of selling their home. His response was that he expected that they would give him half the proceeds. After all, that was going to be his inheritance anyway and he really needed it now. The fact that my grandparents were still alive and needed the money themselves was beside the point.

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  19. I’ve had first-hand experience of being the one to ask for a loan and am happy to report that it went quite well overall. I’m all for family/friend loans because I’d much rather give interest (if they’re charging) to friends and fam than to the banks. It’s important though to have a lot of discussions upfront w/ the fam/friend and also to sign an agreement together of what is owed, how you will pay it back. This keeps some of the feelings out of it and makes it all more real.

    Granted not all of these experiences will turn out well – but with a healthy dose of discernment and getting stuff in writing – this can be a good experience for all.

    Reply

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