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Tougher lending practices have more and more adult children looking to mom and dad for financial help. Before you grab your checkbook, though, be forewarned: loans between family members can create strife. These three steps can help you offer support without damaging your relationship.

1. Know Your Limits Parents are hardwired to want to help their children—but that help shouldn’t jeopardize your own financial security. Limit yourself to loaning an amount that you can afford to lose.

Did You Know?

7% of buyers get loans from their families to help finance their home purchases.

As committed as junior may be to paying you back, illness, a lost job or other crises can derail the best of intentions. If you can easily loan your son the funds to put a down payment on his dream house, great. If not, it’s okay to say no. After all, chances are that he will find a mortgage lender in time, whereas there isn’t a bank in the world that will loan you money to retire.

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2. Communicate Conditions Imagine this: You loan your daughter the money to get out from under crushing credit card debt—and the next thing you know she’s posting vacation pictures online or shopping for a new couch. How will you feel? Conversely, how will your daughter feel if in the wake of your financial support, you start watching and questioning her choices? Sitting down to hammer out exactly how the money will be used and any expectations you each have about spending and saving habits during the term of the loan will save you from awkward conversations and conflict later.

3. Make It Legal Writing a check and telling your child to pay you back whenever he or she can is a recipe for disaster. Instead, put loan terms in writing, specifying the timeline for repayment and the interest rate. Keep in mind that if you charge little or no interest on a loan of more than $14,000, the IRS may view the funds as a gift and subject them to the gift tax rate (consult a tax advisor for more information). Be sure to also include any other conditions you may have. How will you handle late payments? Do you want to be consulted on renovations to the home you’re helping your son to purchase or expect an open-door visiting policy there? Are you hoping to have borrowing rights for the car your daughter is borrowing money to buy? Clarity and honesty on both sides will help ensure that you and your child are on the same page about your expectations from one another.

 

 

 

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