When It Comes To Family And Friends, There Is No Such Thing As A Loan
Mandi Woodruff | Dec. 20, 2011, 9:00 AM |
As you cozy up to family and friends during the holidays, don't be surprised when one of your loved ones sidles up to you with a mug of piping hot cocoa and a proposition:
"Lend me X amount of dollars and I promise to pay you back."
Maybe it's a niece or nephew drowning in private student loan debt or your own child looking to afford the downpayment on his or her first home.
Whatever the case, the debate against so-called intrafamily loans has been hard-fought amongst financial experts.
Here's the central question: Is there such thing as 'just a loan' when it comes to family?
Probably not, says Simon Singer, director of California-based financial planning firm Advisor Consulting Group.
"You should treat (the loan) like a gift," Singer says. "If you're going to do it, just don't expect to get repaid. It might make things easier."
That idea may sound distrusting or pessimistic, but accepting that you may never see that cash again is a crucial step to loaning funds to someone you know.
If the borrower has proven they're not fiscally responsible , then the chances that they'll suddenly adopt a new attitude toward finances is slim to none.
These days, it's no surprise there's been a rise in intrafamily loans, as borrowers are enjoying lower interest rates than ever courtesy of the IRS, as noted by the Wall Street Journal's Anne Tergesen.
And as a lender, you would stand to gain whatever interest rate you choose to charge.
But that's if the loan is paid back at all, says Andrew Schrage, founder of Money Crashers, which has covered the downsides to family loans at length.
"I would almost always advise against infrafamily loans (or intrafriend loans). There are just too many issues that could potentially arise that will sour otherwise great relationships for a long time to come," he says.
After all, nobody wants to play debt collector when it comes to their own flesh and blood.
That's why a family loan seems like such a sweet idea from the borrower's perspective. An uncle, aunt or grandparent probably won't be as cutthroat as a bank when it comes to repossessing a car or home.
Rather than fork over cash upfront, "Help them figure out their best means for getting a loan or explain to them that they will simply have to make sacrifices or delay some of their goals until they can pull together enough money," Schrage recommends. "Encourage them to perhaps pursue a side business idea to raise enough money."
Just don't let things get awkward, if you can help it. No matter what you decide, Singer points out that communication is the key to keeping things civil.
Borrowers should keep lenders updated with any changes in their financial situation that might affect payment schedules, but that's not always the case.
"It's a very difficult place to be in," he says. "Being a lender is not fun, especially with a close friend or family member. But if you want to help somebody, sure you could."