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 was repaid. Often times relatives mentally treat loans from family members different from bank loans 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 find forms and repayment schedules online.
There is a website I found that could also help, Lend Friend. It can help you set up the loan as well as keeping track of payments.
You want to charge an interest rate that is fair. Prime is what banks charge their best customers and currently is 3.25%.
What if they ask you to co-sign a loan? If they default on that loan, you are responsible for the debt and it could affect your credit score and lifestyle if you are stuck making the payments on their motorcycle.
What if your daughter 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 her money or don’t have the money to loan say NO.