Increasing costs of living are seeing more and more adult children turn to their parents for financial help.
Lending money to family is risky; something goes awry, and you end up out of pocket thousands of dollars. If you are financially capable of providing a loan and you choose to help your child, follow the steps below.
Set clear guidelines
Before handing money over set out rules and guidelines for which the money is to be used and repaid. You are not giving them money to splash out on new gadgets and the likes; so make sure they understand this. The loan should be for something substantial such as a car, property, tuition fees. If you see them using the money for something other than it was intended, cancel the loan. Be clear on how regularly you expect repayments and to what value.
Get everything in writing. This will protect all parties should something arise, such as needing the money back for urgent medical procedures or in the case that they separate from their partner and their partner leaves your child with the repayments alone. Careful consideration needs to be made as to what happens in the event of the death of the loan giver. Clear documentation can reduce inter-family disputes and ensure settlement of the estate is not delayed. A letter of intention with all involved signing will prevent trouble should something unforeseeable arise. Keep a spreadsheet detailing repayment dates.
There needs to be consequences if your child does not meet the requirements of the loan. If they were borrowing from a bank, this would result in a bad credit rating and more fees. In order to ensure you get your money back, they need to take responsibility for getting it to you. Increasing the interest rate is one possible consequence. It is important to discuss the terms of the loan upfront to avoid any confusion later on.