Do family and money mix? Should you lend to a relative who is facing financial challenges?
“When a family member asks for money, you should experience both fear and caution. The underlying issue here is that the relationship is at risk,” warned Mike Sullivan, chief education officer for Take Charge America, a national non-profit credit counseling and debt management agency.
Here are 10 tips to consider before writing a check:
1) Evaluate your own finances to avoid any hardships down the road. Consider your financial goals to make sure you can afford to help, especially if you’re close to retirement, according to FOX Business.
2) Determine if a vital lesson needs to be learned. If financial problems were caused by a job layoff, a financial boost may be beneficial. If the money problems are the result of poor choices, the individual may need to work to pay off the bill on their own, according to Take Charge America.
“Otherwise you’re teaching them a lesson that they don’t have to plan; they don’t have to worry about anticipating events because somebody will take care of it. So you’re keeping them from achieving financial independence,” said Sullivan.
3) Lending money is only one option. You can babysit, buy groceries or give family a place to stay.
4) Consider giving the money instead of lending it. That way there’s no awkwardness on either side.
5) Lend money only if you can afford to lose it since your loan is harder to collect than a bank loan.
“According to one report by the Federal Trade Commission, 75 percent of these types of loans are never repaid,” said Sullivan.
6) If you decide to help, draw up a promissory note that both parties sign. Agree on a simple payment schedule, say $100 per month plus interest over 30 months, Ladies Home Journal suggested.
7) National Foundation for Credit Counseling (NFCC) advised checking on possible tax consequences. The IRS is wary of loans that charge little or no interest and may require payment of a gift tax.
Before loaning more than $10,000, talk to your accountant. If the borrower defaults on the loan, document your attempts to collect so you can write-off the loan.
8) Be clear about your expectations. Fully discuss what happens if something goes wrong.
9) Co-signing a bank loan should be considered as giving financial support. If something goes wrong, you’re stuck with the payments and have a strike against your credit report.
10) Don’t make judgments on the borrower's spending decisions. When someone owes you money, it's difficult not to follow their spending habits, particularly if they're behind on payments. Asking about their plans to get back on track with payments is okay, but fight the urge to question them about where they spent the money.
Sources:
Sullivan, Mike. Phone interview. 26 June 2014.
Murad, Andrea. "How to Loan Family Members Money." Fox Business. N.p., n.d. Web. 25 June 2014.
http://www.foxbusiness.com/personal-finance/2012/06/28/how-to-loan-family-members-money
"NFCC: Tips on Lending Money to Family and Friends." NFCC: Tips on Lending Money to Family and Friends. N.p., n.d. Web. 25 June 2014.
https://www.nfcc.org/consumer_tools/consumertips/consumertips_23.cfm
"Q&A Articles." How to Help Loved Ones with Money Problems. N.p., n.d. Web. 25 June 2014.
http://www.takechargeamerica.org/how-to-help-loved-ones-with-money-problems
Roth, J.D. "The Right Way to Loan Money to Family and Friends | TIME.com." Business Money The Right Way to Loan Money to Family and Friends Comments. N.p., n.d. Web. 25 June 2014.
http://business.time.com/2011/09/16/the-right-way-to-loan-money-to-family-and-friends
Stebbins, Sarah. "How to Solve 6 Tricky Family Money Problems." LHJ.com. N.p., n.d. Web. 25 June 2014.
http://www.lhj.com/relationships/family/finance/six-tricky-family-money-problems
Reviewed July 7, 2014
by Michele Blacksberg RN
Edited by Jody Smith