Mature Life Features

Cecil Scaglione, Editor

Loan to Family Member Is Money Down the Drain

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By Cecil Scaglione

Mature Life Features

Neither a family borrower nor a family lender be, to paraphrase Shakespeare.

The Bard also wrote that lending money to a friend is an excellent means of losing both your friend and your money.

With family, you lose your money but you’re still stuck with the relative.  It’s been estimated that as much as $65 billion is outstanding between family and friends.

Before you dig into your pockets to bail out a relative, ask yourself a few questions. First of all, do you need the money? If you do, how are you going to be able to go after it when your relative shows no sign of repaying you? If the borrower-to-be has a history of overextended credit cards, late rental payments, or job-hopping, what makes you think you’re going to get your money back?

What’s the money going to be used for? If the loan will enable a family member to complete a college education or help elderly parents keep their home,  you might give the matter serious thought.  But making a loan to a grandson and his wife so they can splurge on an anniversary cruise or to a daughter who collects race horses makes much less sense.

Parents have another concern. Lending to one child may spark jealousy in your other
children.

Family and financial experts agree on one major point: worse than the loss of money in any of
these person-to-person transactions is the rupture of the relationship. Putting things in writing can avoid some of the personal pitfalls.

Lender and borrower should agree upon and write down the amount of the loan, interest rate, and payment schedule. It’s a good idea to have the signing of the loan document witnessed or notarized. If you need to run it by an attorney, do so.

If a family member or friend who approaches you for a loan doesn’t want anything in writing, you can explain you need it for tax purposes in case you’re audited, that your accountant or tax preparer requires it.

When you do make a loan, charge some interest because the Internal Revenue Service will assume the loan earns interest and will expect you to declare that as income. And it’s up to you to record every payment made as well as giving the borrower a receipt each time.

It’s a financial transaction so treat it as such. If the person making the request for money doesn’t see it that way, you can suggest bluntly that if he or she wants charity, ask for it.

Incidentally, these suggestions also apply to coworkers, colleagues, neighbors, and anyone else who’s going to be around you for any length of time.

Mature Life Features, Copyright 2004

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Written by Cecil Scaglione

October 12, 2014 at 8:08 am

Posted in Finance

Tagged with , , ,

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