Ask Stacy: Should I Lend My Granddaughter Money for Law School?

Photo (cc) by Gerry Dincher

We’ve all been there: either asking for a loan from family or friends, or being on the receiving end of a loan request.

These days it wouldn’t be surprising to find the practice even more widespread. With banks paying basically nothing, lending money to a trusted friend or relative isn’t just a nice thing to do. It could be a smart thing to do.

And that leads us to this week’s question:

At dinner the other night, friends were talking about their daughter in law school. She was complaining that interest on the money she needed to borrow for the coming year would be 7 percent. Her dad said, “Talk to Grandpa. He’ll lend you the money for 3 percent.” My spouse piped up with “For 3 percent, I’ll lend her the money.” I can think of some pros (we are getting no return on our cash) and a lot of cons (we’re not a bank). What does Stacy think?

Before we get started with the answer, check out a video I did about this topic back in 2008. While some of the information in it is no longer accurate — Virgin Money no longer exists — the principles it describes are still airtight.

While Virgin Money is no longer an option, similar services allow you to formalize loans to friends and family. But let’s go back to our question.

Is lending money to family, friends or anyone else a good idea?

If I had to give a one-word answer to this question, I’d simply say “no,” for the reason offered by Shakespeare: “Neither a borrower nor a lender be; for loan oft loses both itself and friend … .”

But a full answer is more complicated, because it depends on who’s doing the borrowing, who’s doing the lending and how well the loan is documented.

Who’s doing the borrowing?

With savings rates hovering near zero, making loans to friends, family or even strangers (peer lending) can make financial sense. But to make it work, you have to think like a banker.

I’ve lent money to many friends over the years, from $50 to $50,000. Almost without exception, these loans became a nightmare. The reason? The people doing the borrowing were either unwilling or unable to pay the money back according to the terms they originally proposed.

Here’s how bankers look at borrowers, and you should as well:

  • Decent candidate for a loan — someone who doesn’t need the money all that much.
  • Good candidate — someone willing to put up collateral that exceeds the value of the loan.
  • Better candidate — someone with an extensive track record of repaying debts on time and as agreed upon.
  • Ideal candidate — someone with all three of these qualities.

So, my question to those considering a loan to our law school student: How good a candidate is she?

Who’s doing the lending?

When you’re a banker lending to strangers, you’re careful whom you lend to and you’re relentless about getting repaid. You’ll use every legal remedy available to get your money back, from dinging the borrower’s credit to suing them to court.

But if you’re an individual who is lending to a family member or friend, you’ll likely be reluctant to pursue remedies available to you. This is the crux of the family/friend loan dilemma: There’s little you’ll do if the borrower defaults, and the borrower knows it. Often, the goal is no longer getting a return on your money but rather getting the return of your money.

So if you’re a lender who’s not all that concerned about being repaid — some grandparents might fall into that category — by all means, become a family banker. Just go into it with your eyes open.

But if you’re the type who not only expects to be repaid, but needs to be, think hard. What will you do if the borrower doesn’t meet her obligations? It’s unlikely you’ll be able to threaten her credit score. Will you send her debt to collections or take her to court?

If the answer is no, you’re ultimately at her mercy.

No matter whom you’re lending to or what kind of lender you are, always do this

Write down the amount, the interest rate, when it’s due, the collateral and what’s going to happen if the terms aren’t met.

Having endured countless bad loans to friends and acquaintances over the years, I’d sooner chop off my own foot with a dull ax than lend money to anyone, family or not, without doing this.

Do anything else, and you might as well consider it a gift.

You can easily find a standard contract online. Have both sides sign it, and you’re miles ahead of a verbal agreement. If the amount is large, have an attorney do it for you.

Will a written agreement guarantee you’ll see your money again? No. Even if you properly dot all i’s and cross all t’s, legal remedies won’t do you any good when you’re reluctant to use them. But at least that agreement will let the borrower know you’re serious.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Secret Departments of Amazon You Should Know About
7 Secret Departments of Amazon You Should Know About

These little-known sections of Amazon are hidden gems for deal-seekers and impulse shoppers alike.

11 Small Money Moves That Will Make a Big Difference
11 Small Money Moves That Will Make a Big Difference

These small money moves will pay off big in the long run.

The 14 Most Deadly Car Models
The 14 Most Deadly Car Models

These vehicles are involved in fatal accidents at least twice as often as the average car.

It’s Worth Paying Extra for These 14 Items
It’s Worth Paying Extra for These 14 Items

Here’s where to find the sweet spot at the intersection of price and quality.

10 Items Every First-Aid Kit Should Have
10 Items Every First-Aid Kit Should Have

Take control of your health and safety by customizing your own first-aid kit with these Amazon purchases.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

20 Things That Are Actually Worth Stockpiling
20 Things That Are Actually Worth Stockpiling

You don’t need a year’s supply of toilet paper to survive an outbreak, but consider stocking up on these items.

Do This in the Car If You Want to Avoid COVID-19
Do This in the Car If You Want to Avoid COVID-19

It takes just seconds to take this simple preventive measure.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.