Baby Boomers U. S. (The Blog)

Lending Money to Adult Children: Is it Asking for Trouble?

Posted: 10 Jun 2012 03:53 AM PDT

The real BBUS post can be found here… Lending Money to Adult Children: Is it Asking for Trouble? by Joe Hauckes © Baby Boomers U. S. (The Blog) . Not on Senior Zen!

This is a Guest Post by Annie Foy, freelance writer. If you would like to Guest Post for Baby Boomers US, check out our Guest Post for Us page.

Money is the world’s way of measuring the worth of a person and although learning how to manage it is extremely important, many go through life at its mercy. It’s not just paper currency; it wields tremendous psychological and emotional power. With that in mind, lending money to adult children can be risky.

Money Management 101 is not taught in school and money is something that can damage relationships between family members. Loaning it can result in either faithful reimbursement or financial disaster. Whether or not a parent should make a loan to their adult child depends on the child’s emotional and financial maturity.

Some Reasons to Beware
Shakespeare wrote “Neither a borrower or a lender be”, and the Bible says the borrower becomes a slave to the lender. There are five reasons to think hard before signing on the dotted line to lend money to an adult child.

With some, paying back the loan is not a priority for them. Well-meaning parents who do not specify a deadline may never see their money again. Without interest and late payment penalties there is no motivation to repay it.
A loan can strain relationships, making it awkward to ask for the money back. Family communication can suffer if the borrower feels guilty and uncomfortable about the loan and the lender feels worried or resentful.
The borrower can end up feeling like they are in the lender’s control. Some say after they accepted money from a family member they felt like a puppet, forced to do anything the lender wanted.
If the family member is irresponsible, lending them money may encourage financial dependency. Throwing cash at the problem doesn’t solve it, but can make a bad situation worse.
Parents still waiting to be repaid could suffer financial hardship if they lose their job. Those who are living on a fixed income can also suffer, especially if the loan affects whether they can put food on the table and pay bills and medical expenses.

Alternatives to making a personal loan are to give a financial gift that doesn’t need repaying, suggesting selling some personal items or agreeing to co-sign a bank loan. This last idea is dicey because if the borrower defaults on the loan the bank comes after the co-signer.

How to Handle Loan Requests

The decision of whether or not to lend money to a family member is always difficult but remembering some guidelines can help. Heeding these guidelines leads to a wise decision. Ignoring them could cause long-term damage to family
finances and relationships.
Consider that if the borrower has a spotty employment record or a prior history of financial mismanagement, they might never pay it back. If the lender has a high tolerance for risk, they might be more likely to loan the money.
Avoid taking money out of the savings or retirement account. Those funds are needed for the long haul and should be protected.
Involving the spouse in the decision keeps the lines of communication open. It also helps by getting a second opinion on the matter.
Drawing up a legal, official contract outlining payment terms make seem strange but it’s good planning. A clause outlining what happens if the lender dies before the loan is paid back is also good.

Saying “no” to adult children when they ask for a loan is easier said than done, after all they are offspring. Helping them instead to learn to manage their financial resources is an important but often neglected parenting skill. Some may see a loan refusal as an example of tough love but in some families, both parties may be better off in the long run.

About the Author: Annie Foy is a freelance blogger and is writing on behalf of paydayloansonline.com.