Should You Lend Money to Family?
A loan is an investment, and you need to be sure that lending your hard earned cash to others doesn’t put your finances at risk. Dave Ramsey says, “don’t do it! People who let family members borrow money have their hearts–not–heads in the right place.
When we love people, we want to see them succeed, and we want to lend a helping hand. Strong emotions can quickly derail the best of intentions when dealing with family or close friends. As a result, when family members come to us for a loan, we empathize; thinking about how we would feel having to ask for cash. And, if life got tough for us, we would expect others would have our back and help us! But that is not always the case.
Is It Safe?
It’s best to use caution when lending money to family. And it is wise to determine if the money is a gift or a loan. A loan should have requirements or agreements regarding the dollar amount and the payback schedule. The IRS allows $14,000 as a gift among family members so that a couple could give a family member $24,000 ($14,000 apiece). And theoretically, you do not pay a gift tax unless more than $5.23M is handed out over the course of your life. If you elect to loan the money, it’s best to set the interest rate, along with a payment plan for tax purposes.
Is it always the same person who needs help? Or do you have multiple requests from both sides of the family? If you are “the bank of choice,” you may need to re-think how you help relatives. In today’s turbulent economy, many older Americans are loaning money to their children. But is that the right call? Essentially, anytime someone asks you for money, it is fair to ask, “why do you need the money?”
Does the Loan Empower or Enable?
When an adult child relies on Mom and Dad to come in and save them from the latest crisis, but the root of the problem is overspending, or under earning, the parent becomes an enabler. This habitual pattern of letting other people take care of one’s careless financial choices, will never stop. It is important for all parties to learn a new set of habits. By clarifying the request for money without emotional turmoil, parents maintain enough money to retire and adult children will become more independent and began making more intentional choices.
On the other hand, a valid need such needing help with tuition can boost the earning power of a graduating student. Or lending money for a substantial down payment to purchase a house can provide a safe opportunity to invest the future. Providing the funds for a loved one to create a better life can be empowering!
Shall We Shake on It?
Take time to talk about the obligation and requirements of borrowing money. Prepare a formal agreement defining the amount loaned and details for repayment. Putting the financial commitment on paper gives the transaction more weight – often resulting in a positive outcome. The majority of people that sign a written contract are much more inclined to fulfill that agreement. For more personal finance info: Follow the Money Nerve