Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about lending to family or friends; specifically, how to respond when your adult children hold out their hands.
Watch the following video to learn what to do when asked for money — and how to protect yourself should you decide to help. Or, if you prefer, scroll down to read the full transcript and find out what I said. You also can learn how to send in a question of your own below.
For more information, check out “The 3 Golden Rules of Lending Money to Friends and Family” and “Still Supporting Your Adult Kids? 5 Steps to Set Them Free.” You can also go to the search at the top of this page, put in the word “lending” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this question is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Nancy:
“My daughter and her husband asked me for a loan. They don’t really need it, but they want to buy their first house, and the larger down payment will give them a lower monthly payment. I’m retired. I’ve got no income, just Social Security, but I do have lot of money in savings. However, I may need that to live on for the rest of my life. What do you advise regarding a personal loan?”
According to the National Association of Realtors, 30 percent of people buying their first house get either a gift or a loan from a relative. So, Nancy’s question is common.
The most important point? If there’s any chance you could lose this money and as a result, end up sleeping in an alley, don’t lend it. Period. Explain that to your kids. They should understand.
On the other hand, if you have the ability, lending could help you. For example, if you lend money at 5 percent, and are currently earning only 1 percent at the bank, you’ll end up better off. As long as you can be certain of being paid back, that is.
You should also be sure that you’re going to be OK with somebody who owes you money sitting across the table from you at Thanksgiving and talking about their latest Bahamas vacation. I’ve personally been in a situation where a friend who was late repaying five grand bent my ear describing a great new car they just bought. Not a good feeling.
Super important: If you decide to move forward, make sure everything’s in writing. If you’re lending for a house, secure your loan with a mortgage, just as any other lender would. There are services you can use, like National Family Mortgage, that will draw up proper paperwork. You can also go to a local lawyer and accomplish the same thing. But if you’re going to lend money to your kids, especially big money, do it right. Draw up legal documents stating the interest rate, maturity date, etc. All documents should be properly drawn up, executed and recorded.
In short, if you’re going to be treated like a bank, act like one.
Finally, if you feel you’re not mentally prepared — like you can’t demand proper paperwork — just say no. Everyone is different. Some borrowers are completely responsible, others not so much. But you should know that loans to friends and family often go sideways. If you’re hesitant, don’t do it. If you’re not hesitant, do it correctly.
Hope it answers your question, Nancy. Meet me here next time and have a super-profitable day!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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