Generation X: Banking On Mom & Dad
BOSTON (CBS) – Should you loan your kids money?
If your adult child wants to use you as a bank hear them out and then make your decision. For example, they want to borrow money for a down payment on a house or to start a business and if you have the funds and are feeling generous consider gifting them the money.
If gifting them the money is not feasible and you want to loan them the money, only lend them what you can afford to lose. Make sure your current lifestyle would not change dramatically if the loan never got repaid. Often times relatives mentally treat loans from family members different than loans from a bank and there is a much higher default rate.
If you want this to be a formal transaction put it in writing and charge them interest. You can get some help here either from an attorney or your accountant to help draw up a loan agreement. If it’s a small loan you can use forms you can find online and include a repayment schedule. Check out NoLo and type in loan agreement.
There is a good website I found that could also help, Lend Friend – Their motto is In Friends and Family We Trust. It can help you set up the loan as well as keeping track of payments.
You want to charge them a rate that is fair. Prime is what banks charge their best customers and currently is 3.25%. Home mortgages, depending on your credit score, can be had for under 4% and home equity loans for around 5%.
If you want to be really hard-nosed about it, ask about collateral for the loan such as the house. You would be second in line behind the bank and the interest would be deductible for your child. This would certainly send a message that you were serious about being repaid.
And if the kid wants you to cosign on a loan think very hard about this. If they default on the loan, you are responsible for the debt and it could affect your credit score.
What if the kiddo wants to borrow the money to pay off her credit card debt? And what if she has been careless with money since she got her first allowance at age 10. If you are uncomfortable about loaning your kid money or don’t have the money to loan say NO. Tell them you can’t afford to.