Lending Money to Your Children

There are many pitfalls in becoming "the bank of Mom and Dad." Here is how to avoid them

Considering the current economic climate, there is a pretty good chance that one of your adult children will ask you for a loan - to pay off credit cards, put a down payment on a house or just to get by after a job layoff. It can be a risky business to mix family and money. However, if you are considering making a loan to one of your children, keep these tips in mind.

Think about your future

Can you afford to provide a loan at this point in your life? If your child doesn’t pay it back, could it affect your ability to afford potential nursing-home care or medical costs down the line?

Get outside help

If you are lending a large amount of money — for a mortgage, for instance — or are including a lot of details in your agreement, experts suggest seeking the help of an attorney. If you want assistance with tasks like tracking the loan, setting up automatic payments and sending payment reminders, ask your bank if it can help you.

Put it in writing

A simple loan agreement — one that details the loan amount, monthly payment due date, interest rate and any reasons for possibly forgiving the loan — can save you a lot of grief later. Plus, such a document makes the agreement feel more formal. Getting your signatures notarized is smart, but not essential.

Update your will

If you have more than one child, consider adding a provision to your will regarding the loan. If the borrowing child hasn’t paid off his loan at the time of your death, the outstanding loan amount should be forgiven and considered that child’s first share of any family inheritance, to make it fair for your children. Be sure to leave a copy of any loan agreements with your attorney and with your will.

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