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Should You Loan Money to Your Grown Child?

 

 


“A recent survey by Ameriprise Financial, an investment firm headquartered in Minneapolis, noted: "Nearly all Boomers surveyed (93%) say they have provided some form of financial support to their adult children. A majority have helped them pay for college tuition or loans (71%), allowed them to move home and live rent-free (55%) or helped them buy a car (53%). any are also helping their kids pay for a car and health insurance, as well as cover basic expenses like rent, utility and car payments." - Tom Sightings from US News and World Report, August 2012

Ninety-three percent. That’s a big number! 

We all want to help our children. We want to see them succeed and when they’re struggling, we want to help out.
Yet, generosity can be fraught with risks. Money is a powerful element in any relationship. Conflict over money is one of the top roots of the high divorce rate in this country. It represents so much…power, control and success. It is a symbol of how we spend our energy and time as we work throughout our lives. That symbolism insinuates itself into every transaction we make with our money…even with our loved ones.

 So, is loaning money to your grown children a good idea?

Generally, it’s not a good idea to act as a bank or loan company for your child. Your wisdom gained from a lifetime of experience handling your own finances is a much better currency between you and your child. But, sometimes there are situations in which we feel we really need to help out. Every situation has its profit/loss margin. If your child has lost his job and is in danger of losing his home (and moving the kit, caboodle and grandkids into your guest room) you may see loaning money as the better choice. In circumstances such as these there are a few things to keep in mind regarding loaning money to your child. 

·        Find out why your child wants the money. Talk about how the money will be used to make sure you’re comfortable with making the loan and that it will be used wisely. Ask whether he has taken action to increase income and/or reduce expenses. Is he thinking of taking a second job and how, specifically, does he plan to cut costs.

·        Make it clear up front that this is an exceptional circumstance and that you will not be agreeing to loan him money on a regular basis. Set clear expectations and terms to avoid repeat trips to your bank.

·        Draw up a contract. A loan arrangement between you and your adult child should be treated as a normal creditor/debtor relationship. You may find your child feeling offended at the idea of a contract between the two of you. Tell him it’s not about trust, it’s about responsibility. The contract is an affidavit that both you, the lender, and he, the borrower, will live up to the terms set forth in the document. In addition, the contract supplies clarity in that it lays out terms, dates and expectations to avoid confusion on anyone’s part.

·        Charge a reasonable rate of interest. A good rule of thumb is to cover the cost of lost income on your part. In other words, charge the rate you could be earning on the money in a certificate of deposit or other savings instrument. It may be difficult emotionally to charge your own child interest. But, keep in mind that you are actually doing him a favor in the long run by teaching him a valuable lesson since he will be expected to pay interest on money he borrows elsewhere. And remember, you always have the option of gifting the collected interest back to the child once the loan is paid in a timely manner.

·        Be aware and sensitive to the fact that your child may feel guilty about his need to come to you for money. He may feel he is a financial failure for his need to come to you for a loan or handout and worry that you think this is the beginning of a trend. You may also feel a little guilty and worried that you somehow failed to instill financial responsibility in your child. You feel bad about treating him like a child, and he feels bad about looking needy and child-like. Talk about these feelings with your child. Getting these emotions out in the open will keep them from growing and festering. Share with your child any similar situations you may have found yourself in at his age. Agree that this is just a bump in the road…a jump start to the success on the horizon.

·        A good rule of thumb is to lend money only in vital situations, such as rent or mortgage payments, necessities such as food, gas, medication for grandchildren or utility bills. If your child wants to borrow some “walkin’ around money” the answer is an emphatic “No!” You’re not an ATM. The sooner that’s agreed upon, the better for your relationship in the long run.

·        The bottom line is this. Adult children sometimes need financial help. They may need a loan or may even be forced to move back home for a while. Our role as parents is to first sit down with them, go over their finances and help them develop a plan to get them back on a better financial footing. Only when all else fails should we consider loaning them money.