It can be very awkward when approached by a family member to lend them money and probably one of the most sensitive personal finance topics going. On the one hand, family is family and who wouldn’t want to help someone out of a difficult financial situation if they could? But what if the financial request happens on a reoccurring basis? The economic environment isn’t easy for many starting out, going on to a post-secondary education or even buying a home.
It is not unusual for children to look to their parents for financial assistance to help them bridge a financial gap. As parents, if you can help, in many cases you want to help.
For some Boomers, though, this can be a delicate situation. You want your children to succeed; however, financially speaking, they have more time on their side and you could end up jeopardizing the retirement you may have saved for.
One option would be a family loan, which is very different from the family gift. With a loan comes expectations of repayment within a reasonable period of time, and possibly even with nominal rates charged.
Here are a few considerations when deciding if you should lend a family member money:
Understand your financial situation. You need to reassess your own situation before offering up financial resources to help others. There is no guarantee down the road they will be there for you should you out live your retirement funds. Not because they don’t want to be there, but possibly because they simply can’t afford to be there. Even those who are well-to-do financially have to set limits so they one day don’t become a burden on their children.
Sort out the details. If you agree to their request, fully discuss the terms. Emphasize that this is a loan — not a gift — and agree on terms for repayment. Your child needs to understand that loan repayment is a higher priority than buying a new car, or a weekend away for example. Children need to understand the consequences of not repaying a loan. In some cases, I’ve seen the money borrowed, deducted from an inheritance or an equalization of sorts with other children to balance out a loan that inadvertently turned into a gift. But also note, once the terms are agreed to as the lender, you can’t continue to bring up the fact they owe you money. You can’t hold it against them and as long they are repaying the loans in the manner you both agreed to. If they decide to take a trip that has to be okay.
Put it in writing. Having a contract can help avoid family tension and a potential estate planning debacle.
Set boundaries. While most parents believe in treating offspring equally, this doesn’t mean they have to agree to a request from one child simply because they loaned money to another. If the family value has been fairness and that is how you have lived your life with your children, children will realize different children may need different things at different times in their life and that is okay, because in the end, it will all balance out.
As parents, we all want to help our children be successful, be financially strong and live a great live. But when the ask comes in, the decision to lend money should be a fact based decision, dependent on your financial security.
CTV's Chief Financial Commentator Pattie Lovett-Reid offers a financial tip of the day during the month of February for Your Money Month.