All in the Family? To Loan or Not to Loan?
The Great Recession of the past several years has caused many changes in how we look at our finances – regardless of age group – retiree, senior, worker with a young family, college student getting ready to graduate, even a high school student. So many circumstances have caused us to do a lot of rethinking about how we spend and save. Unfortunately, for some folks, no matter how much planning or careful spending has been done, the bottom has fallen out.
Adult children are moving back in with their parents, sometimes with their own children. Parents are faced with having to move in with their kids. Retirees or seniors anticipating a slower life style have had to rethink how the ‘rest’ of their life is going to play out. And much of it centers around money. It isn’t unreasonable to think that if you are in a financial condition that you can rely on, the possibility exists that someone in your family is likely to ask for a loan. We are okay with sharing advice and support and love and comfort, but what happens when it goes beyond that?
1. Stop and take a deep breath and get out the budget spreadsheet for both parties. No matter the relationship be honest. No sugar coating. Can you afford to be generousand help out? Have a very honest one-on-one conversation about the request for help.
2. What is the basis of need? Tuition, housing, medical, transportation, excessive debt?
3. Are there alternatives to lending money? Think twice about co-signing on any kind of financial agreement – car loan, rental agreement, utility connections, etc. Non-payment can also impact your credit rating, probably for 7 to 10 years even if you end up paying off the loan.
4. If you feel that you can help by lending, then there are steps to take to avoid loss by nonpayment back to you.
5. The person you are considering lending to needs to provide a current credit report. If it appears to be a bad risk, then reconsider your decision. Regardless of whether it’s a child asking or a cousin or a close friend, does the person asking for the loan have a history of bad financial decisions?
6. A promissory note is a must. Set up a logical repayment schedule.
7. Treat this agreement between you and the borrower as a business deal. The whole family or group of friends doesn’t need to be in on this event.
None of us ever want to have to ask, but times now have changed a lot. If there is anything we can do to help you consider making a decision regarding this type of situation, please feel free to give us a call.
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