Get Smart About Loaning Money to Loved Ones

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Get Smart About Loaning Money to Loved Ones Powered By Docstoc
 Get Smart About Loaning Money to Loved Ones

 In tough economic times, it becomes more likely that you'll run into family or friends
 asking to borrow money.

 While some people rule out the practice altogether, there may be circumstances
 where you decide it's worth the risk. These are some points to keep in mind if you're
 trying to decide whether to loan money to loved ones and how to structure personal

 Deciding Whether To Loan Money

    1. Protect your own finances. Review your own financial status so you know how
       much you can truly afford to lend. Your generosity may backfire if you wind up
       falling behind on other obligations.

    2. Clarify the purpose. It's usually reasonable to ask what the funds are being
       borrowed for. You may want to distinguish between tiding someone over
       during a period of unemployment rather than buying them a larger television.

    3. Encourage money skills.If you're dealing with someone who has chronic money
       troubles, they may need stronger financial skills instead of more cash. Offer to
       help them develop a budget or suggest free classes they can take at a local
       library or community center.

    4. Provide other forms of support.Think creatively about all your options. Offer
       to babysit your grandchildren if the lack of child care is interfering with your
       children's job search.

   5. Consider family dynamics.Favoritism or the perception of it can alienate family
      members. There may be valid reasons for treating individual children
      differently, but seek to treat them all equitably.

   6. Resist the urge to meddle.Be honest with yourself if it's going to gall you to see
      someone visit an expensive spa while they owe you money. You may both be
      better off if you decline their request in the first place.

   7. Understand your intentions.It's curious why people complain about someone
      buying their affections when they appeared to be willing to sell them. Still,
      you're better off with people who value you sincerely.

Structuring A Personal Loan

   1. Put it in writing. Draft a promissory note. You can find many simple templates
      online. Include the amount of the loan and the payment terms. If you amend
      your agreement, put those changes in writing too.

   2. Calculate interest. Depending on the amount in question and other factors, the
      IRS may require you to charge interest. If you're using a credit card or
      withdrawing money from your savings, you may need to be compensated for
      any fees or losses you incur.

   3. Consult professional advisers. Tax attorneys and accountants can advise you
      on your individual circumstances. Strategic estate planning may enable you to
      help your family on the most favorable terms.

   4. Provide receipts. Write out a receipt for every loan payment. Keep a copy for

                                        yourself and give one to the borrower. It will help you both to stay on track and
                                        provide documentation if any misunderstandings arise.

                                      5. Avoid co-signing.Unless there are extraordinary reasons to justify it, co-signing
                                         for a loan is often an unacceptable risk. You wind up liable for the full amount if
                                         the borrower fails to pay. Even if they pay late, your credit rating will be hurt.

                                      6. Maintain privacy.Keep the details of the loan limited to those directly involved.
                                         That usually includes you, the borrower, and any professional advisers.

                                      7. Plan ahead for losses.Know in advance what you’ll do if your loved one fails to
                                         pay you back. For your peace of mind, you may decide it's best to write off the loss.

                                   Protect your finances and relationships by proceeding carefully with loaning money
                                   to friends and family. Take sensible precautions or look for alternative ways to help
                                   them out.


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Curtis Rose is an experienced professional with extensive experience in all
aspects of personal finance. Curtis writes and publishes articles, courses,
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