Mature Life Features

Cecil Scaglione, Editor

Lending to Family Member Not Good Business

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

Shakespeare also wrote that lending money to a friend is an excellent means of losing both your friend and your money. But with a relative, you lose your money and the family ties become frayed.

A colleague lent in-laws half the price of a home to help them acquire the property. It didn’t take long for the in-laws to resent the situation. Not only have they not paid off any of the loan, they’re no longer speaking to their benefactor.

It’s been estimated that as much as $65 billion is lent to a family or friend.

It seems logical for people to turn to their parents or siblings in time of fiscal misfortune.

But before you dig into your pockets to bail out a relative, ask yourself several 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, you’re foolish to expect the money will be repaid.

The use of the money is an important factor. If the loan will be used to enable a family member to complete a college education or help elderly parents keep their home or give a start-up boost to a family entrepreneur, you might give the matter serious thought.

Making a loan to your 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: giving a loan to one child may spark jealousy in the 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 fracture of the relationship. In many cases, the borrowers, either through guilt or resentment, distance themselves from their benefactors.

Putting things in writing can avoid some of the personal pitfalls. This is a financial transaction and should be treated as such.

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

If the person makes a request for money and doesn’t see it that way, you can suggest bluntly that if he or she wants charity, ask for it.

Written by Cecil Scaglione

November 19, 2021 at 5:00 am

Posted in Finance

Tagged with , ,

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