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Loaning Money to Grown Kids
That was then. A “loan” for a movie became a gift. You were always happy to help them when you could, and besides that, five bucks here and there didn’t really matter. Now your children are adults and you’re being approached about loaning enough money for a down payment on a house or a car. How much should you give or loan? Money matters can become a relationship killer if not handled carefully. In light of this challenge, here are some practical tips for knowing when to open up your wallet, when to talk things out, and when to say no and teach an important lesson. When Not to Loan or Give Money to Adult Children The money will primarily be used to keep the child from experiencing the consequences of bad decisions. Rob and Pam Perkins had struggled with their daughter, Judy, for twenty years. When she was fifteen she began breaking the law, using drugs, and behaving immorally and irresponsibly. The Perkinses spent thousands of dollars getting her out of one jam after another. Each time they helped her, it appeared she was improving her behavior, but it was usually only a show, or, at best, a short-lived improvement. Now Judy was in real trouble. She had defrauded her employer and was faced with a stiff jail sentence if she couldn’t come up with the $5,000. She approached her parents for a “loan.” After much contemplation and prayer, Rob and Pam told Judy they loved her, but this time they would not give her the money. They said that since she committed the crime, she would have to pay the consequences. Judy faced the consequences of her actions and learned from them. Bailouts, even when the circumstances are not this dramatic, rarely stop the behavior that got the adult child into his or her predicament in the first place and usually create more strain in the relationship between child and parent than would have existed if the money had not been forthcoming. The parents will be hurt significantly if the money is not paid back. Parents are sometimes torn between wanting to help their children and putting their own financial future at risk. However, parents should not loan more money than they can afford to lose. Their retirement should not be put into jeopardy, and their present standard of living or financial well-being should not be compromised if there is not a payback of their loan. This is a cardinal rule. Only the most unusual circumstances should warrant consideration of an exception. The money is being used to “buy” a better relationship with the adult child. The folly of this logic should be obvious. No acceptable relationship can ever be established on the basis of anything other than mutual respect and love. Money is not a substitute nor is it a solution for undeveloped respect, artificial love, or wasted time that should have been spent developing a meaningful, long-lasting relationship. If parental time and attention to an estranged adult child has not worked to improve relationships, parents should be patient and let time work in their favor. It will. Money won’t. The adult child has other acceptable options. Parents need to let their adult children learn independence by encouraging them to utilize potential resources other than their parents. Mack and his wife, Sue, were buying their first home. They qualified for a loan, but were concerned they might not be able to come up with the ten percent down by the time escrow closed in three months. They approached Sue’s father to see if he would loan them half of their down payment. This would relieve some pressure on them and also allow them to buy some furnishings for their new home. Sue’s father told them he would lend them the money that was needed to pay the down payment after they had done everything they could do to come up with the money. Over the next three months they pinched their pennies, and Mack did additional work on the side to earn more money. When escrow closed, they had saved enough for their home. They were glad that Sue’s father had not jumped in with the money when they had asked. They both knew it would have been unlikely that they would have worked so hard to save their own money, and they would have incurred unnecessary additional debt as a result. The natural tendency for most parents is to want to help their adult children. Giving or loaning money is one of the ways they can do this. Often, however, this act is counterproductive. Money should not be given for the purpose of improving parent-child relationships when there are better alternatives available to the adult child. Otherwise, substantial long-term harm may actually be done to the child. Deciding to Loan or Give Money to Adult Children Parents should consider loaning or giving money to their adult children when none of the above conditions exist and when the money would likely improve their children’s spiritual, emotional, mental, or physical well-being. In making such a decision, parents should consider the potential ramifications for other members of the family—remember, what parents give to one child they may not be able to give to another. If parents decide to loan a significant amount of money to an adult child rather than to give it to him or her, they need to clearly state that and establish a specific payback schedule and interest rate. A contract should be drawn up and signed by all parties concerned so there is no misunderstanding about the agreement and parental expectations. If parents are unsure whether to loan money or give it as a gift, they are usually better off loaning the money. They can forgive the debt if they want to. Unwise lending or giving of money to adult children is one of the biggest causes of problems in parent-adult children relationships. In most instances, those challenges can be avoided by parents saying no when they should say no. On the other hand, parents can be of significant help to their children with gifts or loaning money. Determining when this should be done is not always easy but through prayer and as you assess your situation and your child’s circumstances you will know what is the best option for all involved. 7 Steps for Loaning Money 1. Get Real Take an honest look at your emotional and financial situation. If loaning jeopardizes relationships, retirement, or immediate needs, then don’t loan the money. 2. Don’t Rush Don’t be too hasty. Take your time and think about all of your options. You don’t want to do something you’ll later regret. 3. Evaluate the Petition Most parents feel fine about helping out in an emergency, however not all requests will help your children. Does this money breed self-sufficiency or more requests for help? 4. Create a Plan Whether you are loaning money or helping a child pay off debt, you ought to be as professional as possible. Have a formal agreement with a stated interest rate and a repayment schedule. If you’re financially weaning a child, plan how you will taper off or reallocate funds. 5. Communicate Give clear expectations, timelines, and limits. Explain when money will be forthcoming, when it won’t, and when it should be paid back in full. 6. Write it Down Have a contract drawn up. This is not so you’ll be able to take your kids to court (don’t ever let it get to that), but writing it down will clearly define the expectations for all parties. 7. Stay Strong Remember, relationships always come before money. But, don’t feel like you are hardhearted if you say “no,” and don’t feel obligated to give. Sometimes saying “no” really is the best thing to do for them. This may be the experience that finally teaches them financial discipline. LDS Living Magazine
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Today's date: March 19, 2010
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