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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.
Posted in tax
Should you send your child off to college with a credit
card? Opinions are divided, both among parents and financial advisors. It's a
situation that can work out really well or really badly, depending on the
student and the parents.
At its best, everyone benefits from giving a student a card.
The student uses the card for budgeted expenses, pays off the balance each
month, and starts building a good credit history. The parents sleep better
knowing the student has a credit source in case of emergencies.
At its worst, the student is unused to managing money or
living within a budget. The student fails to make payments on time, incurs high
interest charges, and ruins his or her credit history. The parents have to step
in to bail the student out.
Among the risks:
* Lack of experience in managing money can lead a student to
overspend or to neglect making payments on time.
* Peer pressure may encourage a student to spend on
entertainment or clothes, just to keep up with friends.
* Failure to agree on a budget beforehand can result in
shock when you see your student's monthly statement.
* Parents co-signing for the card can put their credit
scores at risk, too.
* Loss or theft of the card can lead to problems that take
time to resolve.
To minimize risks:
* Set ground rules for use of the card. Agree on what it may
and may not be used for. Put the agreement in writing and have the student sign
off.
* Establish a budget. Talk regularly about how your student
is managing his or her expenses within the budget.
* Consider alternatives to a credit card, at least for the
freshman year. Consider using a prepaid credit card, or set up a checking
account with a debit card. That allows the student to gain experience managing
expenses within a budget.
Finally, remember you may have no say in the matter.
Students are bombarded with credit card offers as soon as they enroll. Card
companies are usually happy to issue a card to any student over age 18 in his
or her own name.
Last Updated by Noel Dalmacio on 2012-08-15 11:03:21 AM