Financial Tip of the Week - Tips on Lending Money to Family and Friends
(Part 2 of 2)
Source: Military Community and Family Policy (MC&FP) Weekly eNewsletter
Here are some tips on lending money to family and friends.
- Money is an emotionally charged issue that has torn apart many a relationship. The National Foundation for Credit Counseling offers the following suggestions when deciding whether to lend or not to lend to a loved one: Just like in Vegas, don't risk more than you can afford to lose. Give yourself more legal standing if the borrower defaults. While putting it in writing is smart because it makes the borrower more accountable, be aware that it won't guarantee you will be repaid. It's simply another layer of protection.
- Be forthcoming about any legal steps you will take to collect an unpaid loan. Jointly reviewing a worst-case scenario in advance of the situation can go a long way to preserve a relationship if things start going south.
- Divorce yourself from making judgments on the borrower's spending decisions. When someone owes you money, it's difficult not to watch how they spend their money, particularly if they're behind on payments to you. Fixating on their frivolous spending can drive a wedge between the two of you. Inquiring about their plans to get back on track with payments is justified, but resist the urge to grill them over where the money has gone.
- Think long and hard before agreeing to co-sign a loan. When you co-sign a loan, you are agreeing to repay the loan even if the lender defaults. And, you may not be notified until the loan is several months delinquent. Such a delinquency will negatively affect your credit rating, as well as that of the primary borrower.
- Consider requiring collateral for large loans. If you are lending money for a car, insist that you be listed as the lien holder on the title. If the loan is for the down-payment on a house, have the loan drawn up with you listed as the second mortgage holder. If the borrower defaults, any equity remaining after the primary lender is repaid will go toward paying off your loan. If you are going to require collateral, it is wise to have the loan handled by an attorney.
- Check on possible tax consequences. The IRS frowns on loans that charge little or no interest and may require you to pay a gift tax. Before loaning more than $10,000, talk to your tax accountant to ensure you are protected. If the borrower defaults on the loan, document your attempts at collection so you can write-off the loan.
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