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Financial Tip of the Week - Tips on Lending Money to Family and Friends
(Part 1 of 2)

Source: Military Community and Family Policy (MC&FP) Weekly eNewsletter

Here are some tips on lending money to family and friends.

  • Money is an emotionally charged issue that has torn apart many relationships. The NFCC offers the following suggestions when deciding whether or not to lend to a loved one:  Just like in Vegas, don't risk more than you can afford to lose.
  • Loaning money to friends or family is a gamble, so never make a loan if it's going to put your own financial situation on the skids. However well-meaning the individual is, none of us knows what tomorrow holds. Only loan the money if you're comfortable with the idea that you'll never see it again.  
  • Do not dip into your retirement account. Loaning money is not a good idea if it means that you have to risk your retirement savings. Protect this nest-egg as though you were the mother hen, and don't let any of your chickens touch it.
  • Involve your spouse or partner in the decision. Communication could not only save you money, but could save your marriage or relationship. If you and your spouse don't agree on making the loan, it could result in significant stress on your relationship.
  • Evaluate the impact the loan will have on other family members. If you loan money to one child, you're setting a precedent. What if other children are not as responsible, thus the risk of them repaying a loan is greater? Be prepared to deal with the potential strife such a situation could create within the family.
  • Consider the reason the borrower needs the money. Do they want the loan because of an emergency like loss of job or unexpected medical bills, or because they made poor spending decisions? Will it be used for something that will improve their life, like a down payment on a home or education?
  • Don't be an enabler. If the borrower is engaged in a destructive lifestyle, and is habitually in financial hot water, be emotionally supportive rather than financially supportive. A better use of your money would be to pay for professional counseling to get to the root of the problem, as bailing them out of their current crisis won't address the underlying issues.
  • Treat the loan as a business arrangement. After all, you've now become the banker, and bankers take things seriously. Once you have agreed on the amount of the loan, discuss the interest rate, term, payment due date, and late fees. To figure out monthly payments, including interest, consider using a loan calculator, such as the one available at Bankrate.com.

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