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What to consider before lending money to family and friends

 

When your best friend views your nest egg as a source of start-up funds for his latest business venture, or your nephew hits you up for a car loan, your first impulse may be to reach into your bank account to help. But it's a fact that loans to family and friends often end up straining both finances and relationships. As Shakespeare said, "Loan oft loses both itself and friend." In other words, if you lend money to friends, you often don't get paid back, and the friendship itself may disintegrate.

 

It's best to consider a loan to someone you love as an "arm's length" transaction. If you're pondering such a loan, keep the following in mind:

 

* You can just say "no." It's your money, after all. Do you really want to raid an emergency fund or dip into your child's college account to finance a friend's business idea? Think like a bank. It's reasonable to ask tough questions about the person's bank accounts, potential sources of income, planned use of loan proceeds, and spending habits before extending credit.

 

* Consider a gift. If you're comfortable sharing your resources, you may want to provide a monetary gift with no strings attached. In many cases, this is the best solution because neither you nor your friend expect the money to be paid back. Unlike a loan, this type of arrangement can forestall misunderstandings and hurt feelings later on. Of course, you should not give money if doing so would unduly strain your own finances.

 

* Formalize loans. If you decide to lend more than a small amount to a friend or family member, it's generally best to draft a written agreement. This can be as simple as filling out a promissory note (available online or at office supply stores). Such forms spell out the basic terms of the loan -- amount, interest rate, payback period -- and provide some limited protection should you and the borrower end up in small claims court. Another recent innovation is the use of direct lending (also called social lending or peer-to-peer lending) websites to facilitate loans between family and friends. For a fee, such sites can prepare loan documentation, send payment reminders, issue regular reports, even facilitate electronic fund transfers. If the loan involves a significant amount of money, check with your attorney.

 

Remember: Many personal relationships have been damaged when loans go awry. So proceed with caution.

 

23 Apr 2015
Use your income tax refund wisely

Posted in tax

To many people, an income tax refund might be one of the largest single cash receipts for the entire year. Avoid the temptation to spend your refund on consumption items. There are several places you can invest the refund to enhance your long-term financial goals. You can pay off current debt, invest in the stock market, make home improvements, or invest in a pension plan for retirement.

 

Let's assume you will be getting a $5,000 tax refund. The best return on your investment may well be to pay off current amounts you owe that have high interest rates. If you are carrying a credit card balance at 15% interest, a reduction in the balance is the equivalent of earning a 15% return on your money. Your $5,000 payment will save you $750 in interest expense over the next year. This is an outstanding return when compared to most other investments. If you leave the $5,000 balance on the credit card and make only the minimum monthly payment, you can pay up to twice that amount in interest, depending on your interest rate.

 

A second choice might be to pay down the principal balance on your home mortgage. A $5,000 reduction in a 4% thirty-year loan will save $11,000 in interest expense over the life of the loan.

 

Consider putting the cash into your retirement program. Only one out of five Americans can retire with adequate resources to live independently. $5,000 invested at a 6% compounding return will be worth $28,000 in thirty years. Your retirement fund could grow to almost $450,000 if you invest $5,000 each year for thirty years at a 6% compounding return. Have you ever heard anyone say that they retired with too much money?

Last Updated by Admin on 2015-04-23 12:25:59 PM