When loaning money to family or friends (or not) to buy a home, start a business, pay off debt – or any other reason – these tips can help you eliminate misunderstandings, protect the relationship and safeguard your money:
- Only lend what you can afford to lose. The financial circumstance that put the person in this situation may not be over. Higher interest rates, inability to get credit, ongoing employment or job struggles can continue to plague people after their initial issue is resolved.
- Discuss terms. If it’s a personal loan, specify at what point you expect them to start paying you back: Once they get a job and have their first few paychecks under their belt, for example. Charging interest is prudent, particularly for larger amounts as you might have tax obligations, such as a gift tax (amounts larger than $14,000 in 2014). It can help insure you’ll be paid back more quickly and recoup interest lost when your money is not in your own bank or investments.
- Put it in writing. This may seem excessive, particularly if you are helping your mom move into a retirement home or a nephew with college. It can prevent misunderstandings later on, which are particularly valuable for avoiding family issues after the death of one of the parties involved, according to Forbes.
- Determine the most prudent way to handle the transaction. Instead of giving someone cash who has demonstrated difficulty meeting their responsibilities in the past, it might make more sense to pay specific bills directly?
- Don’t use the debt as a guilt mechanism. If you’ve offered money and it’s been accepted, lording the obligation over someone is sure to bring about tension and a potentially severe rift in the relationship.
- Consider repercussions. If a parent lends money to one child while the others struggle or go into debt, there is likely to be some animosity in the family. As any parent knows, it’s very difficult for all things to be equal when raising children. One might go to a more expensive school, while another pursues a career in the arts; one may want a large wedding while another elopes or stays single. Setting a consistent guideline might be the best way to keep peace in the family.
- Be clear. Each incidence of needing to borrow is going to be unique to each situation and the parties involved. If it is an isolated circumstance that resulted from a layoff or health issue, it is not the same as someone who has repeatedly mismanaged their money and opportunities in the past. If it is a recurring problem, increase the repercussions each time the issue escalates or cut them off altogether.
- Learn to say No. “Don’t let feelings of guilt cloud your judgment,” said Ruthann Driscoll, director of advanced planning at Northwestern Mutual, in a Forbes.com article. “Instead, make a policy for lending money and then stick to it. That way you won’t be caught in a situation where you feel cornered.”
- Be pragmatic, yet compassionate. In some markets, saving the down payment to purchase a first home can take years, even with a good job and diligent savings. These are the times family and friends can make all the difference to help get you into a home before you are priced out of the area.
- Let it go. Know where the money is going, but also be prepared to step back and let it go if you think it is not being spent the way you would personally handle it. Second-guessing someone to whom you’ve lent money is one of the fastest ways to drive a wedge in the relationship.
Now that you’ve established that it is prudent and/or even necessary to loan – or ask for – money, these tips should help insure an equitable arrangement is reached and the relationship stays intact.
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