When you think about having kids, you think about child care, summer camp, braces and college tuition. But, did you ever think about personal loans, car payments or mortgages? You better think about loaning money to adult children because you may be doing just that!
According to a 2015 Pew Research Center report, six in 10 Americans with at least one adult child say they’ve provided their kids with some financial support within the past year. The reality, however, is that your bank account will likely continue to be tapped long past the day your kids turn 21.
A TD Ameritrade survey released in August found that parents loaning money to adult children gave them an average of $10,000 over the past 12 months. That’s not just pocket change!
It’s very possible that parents expect to be paid back at some point if they are loaning a considerable amount of money. However, entering into parent-child lending territory can have its complications. This could lead to big financial burdens and broken family ties.
Here is what the experts are saying about loaning money to adult children:
- Only Loan Money You Won’t Miss – Before writing a check, make sure it’s an amount of money you can stand to part with. It should also be money you don’t need for your own financial stability.
- Be Sure You Know How the Kids Will Use the Funds – You think the money is to pay off a student loan and suddenly they have new furniture and the latest electronics. Coincidence…probably not! You can usually pay the lender directly or make the loan conditional.
- Set Terms for Late Payments or Defaults – Treat the loan as if you were the bank giving the loan. Lay out what happens if he/she is unable to pay you back in a timely manner. Hold them accountable!
- Present a Unified Front – Before saying ‘yes’ to a loan, make sure you and your spouse have agreed upon all of the loan terms. It will prevent arguments later. It will also help protect one spouse in the unfortunate event that the other isn’t around to enforce the agreement.
- Get Everything in Writing – Even though the money transaction is between family, it is best if it is treated like a business transaction. Use a promissory note with all details included. The details consist of the interest rate, payment schedule & any other conditions.
Something else you may want to consider is the following. If the request for a loan becomes a continuous habit, require your children to enroll in credit counseling before you agree to lend them additional money!
Also, you might consider making payments on behalf of your children instead of handing them the money. Source…
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