With the economic recession having its way with everyone's finances, and with loans being as tough to get as they are these days, it's awfully difficult to not be constantly aware of a relative or two who aren't reasonably wealthy, and in a position to help. All of a sudden, every little thing you ever did for that relative seems to come easily to the recollection, and you feel that perhaps you do have a good enough relationship with them that they wouldn't mind helping you. If you happen to be the well-off relative though, what should you do when troubled cousins, nephews, children, aunts and uncles show up to be given a hand with their troubles?
Most personal finance experts warn you against it. Loans within the family often lead down a path of ruined relationships, messed up finances and sometimes even trouble with the tax man, they say. What does one expect being generous with help like this? Gratitude? Prompt and timely repayment? More closeness? Have you ever spoken to someone who's done this before? The complaint you'll hear most often is how there isn't as much gratitude as there is resentment; because the lender would expect a bit of responsibility in the way they pay the loan back. And they start dreading ever seeing you at a family dinner. It could reach your ears the fact that they went and took an expensive holiday somewhere, or bought a new car. They know that right away you're going to be thinking that for all the trouble you took loaning them money when they needed it, they couldn't cut back a little and show you their appreciation by paying you back first. The rule apparently is that if you help with money, loans or anything else, you'd better do it out of a great deal of personal closeness with that person, so that you wouldn't mind it if the money took its time coming back.
Sometimes as it often is these days, it could be your own children asking for money - loans they promise to pay back soon. Everyone's out of a job, everyone has their hours cut back; how could you not help? Your children certainly qualify for the personal closeness you invest in them. When my children asked me for help with $30,000 worth of loans they were unable to pay back, I agreed right away, but I also wanted to show that it wasn't going to be a loosey-goosey loan that might possibly turn into a gift soon. What I did was, I hired a company to administer the loan. We talked it over with them and my daughter, and we agreed that she could pay interest to keep it serious. The financial company drew up a contract that stated the loan would be paid back in three years, and we would get paid 3% in interest. My daughter arranged with her bank for the money to regularly and automatically be sent to my account at the beginning of each month out of her checking account, and the whole deal cost only $200 to formally draw up and a $10 monthly fee. Of course, if your loan was only, say, $5000, it might not make sense to do this.
My daughter is grateful too; she was grateful that we aren't indulging their casual attitude towards money, that they could learn from the experience. We'd hired this third party, and there was no way that she was going to take it easy now. Without them, if money ever felt tight during the month, she would be tempted to let it slide "just one month". Right now, she has no control over it - it's an automatic deduction at her bank. Could you even guess how much is made over in family money loans nationally each year? It's a cool $400 billion. However, it's cool to help your family out only if you can do so without putting yourself on the path to the poor house. A good rule to adopt would be to not make a loan if it would completely ruin you if you were not paid back.
However, if you make over money loans, the interest received is taxable. Even if you don't ask for interest, the IRS can still go on to treat you as if you did earn interest. And whatever the loan money your borrower doesn't pay back, he is taxable for that. Just remember - if the loan that changed hands is worth about $10,000 or more, make sure that you spare the tax man a thought.