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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
Pre-schoolers and teenagers obviously have different
financial concerns and abilities. But there are a few basic lessons that all
children should learn by the time they enter college or start a career.
*Having money means making choices. Teach your child how to
choose between spending and saving, and how to do both intelligently. A regular
allowance will help your child gain real-world financial experience.
*Money requires planning. At the appropriate age (usually
about nine or ten), show your child how to develop a simple spending plan. In
later years, show how to plan for larger expenditures.
*Money means responsibility. Inevitably, your child is going
to make some money mistakes. Try to avoid criticism, but don?t automatically
fix every problem and let your child off the hook. Help analyze the reason for
the mistake, and suggest how to avoid it in the future.
*Money needs to be managed. Specific lessons might range
from how to compare interest rates on savings accounts, to the pros and cons of
mutual fund investing. But there should be one common element to all of your teaching
in this area: money doesn?t take care of itself.
The way you handle your money may be the most powerful lesson of all for your children. For your child?s sake, as well as your own financial well-being, it?s important to practice what you preach.
Last Updated by Noel Dalmacio on 2012-11-21 01:12:35 PM