Loaning Money to Your Child
In this article, you will find:
- Advancing money
- Make it formal
Loaning Money to Your Child
What if an advance on an allowance just isn't enough to help your child out? For example, what if your teenager wants the latest electronic game platform that costs a few hundred dollars and he doesn't want to wait until he gets his birthday money from Grandma? Should you become a banker and loan the money to your child?
Piggybank on It
You can make a gift conditional. “I'm giving you the money to help you pay for college.” If your child uses the money to buy a new stereo system, then the gift is transformed into a loan that must be repaid.
Watch Your Step
Lending money to your kid is a little like playing chicken. What will you do if your kid defaults on his obligation? You're not going to sue, and you're not going to throw him out in the street. You've just blinked. Remember this before you make the loan.
You have three choices:
- You can say no and refuse to help. Maybe you're saying no because you don't want your child to have the money. Or, maybe you just can't afford to help. Either way, it's an important lesson for your child to learn that, as the Rolling Stones have said, “You can't always get what you want.”
- You can give the money that's wanted without asking for any repayment. Here you're making a gift, not a loan. You might want to label the gift as a reward for something—making the honor roll or getting the lead in the school play.
- You can make the loan and set conditions. For example, you can insist on interest or make the loan interest-free.
When to Be (or Not to Be) a Banker
It's not easy to say no to your child. But when you're asked to lend her money, when is it okay to say yes? And when should you say no?
Say yes in these cases:
- The money is needed for a good reason. For example, your child needs help buying a car that she can afford to keep up. Or, her savings won't cover her college expenses and she prefers to borrow the money rather than get it as a gift from you.
- You believe your child is responsible enough and able to repay the loan. If she has an after-school job and has repaid a loan from you before, you can be pretty comfortable with the situation. But if she's always asking for more, there's something wrong with this picture. Go back to Teaching Your Child About Money Management, Savvy Shopping Strategies for Kids, and Setting Up a Budget for Your Child.
- You can afford to make the loan. Don't let guilt drive you to financial problems. Just because a child asks for a loan doesn't mean that a parent is required to make it. Doing so might force a parent into debt of her own, which doesn't make much sense.
Before lending any large amounts of money to your child, consider the impact that such a loan might have on your other kids. Are you depriving them of something to make the loan to one child? Are they going to want (and expect) the same treatment? Is the loan going to cause jealousy among your children? It's a good idea to address these questions before you agree to make a large loan.
Say no in these cases:
- You disapprove of your child's use of the money. If your 16-year-old wants to buy a motorcycle and you're horrified at the prospect, just say no. This is really more a question about the motorcycle than about making a loan, but you can quickly end the possibility that he'll get a motorcycle and then later discuss your feelings about his riding a motorcycle.
- Your child is becoming a chronic borrower. If he always seems to be in need of cash and constantly asks you for loans, it's time to say no and have him brush up on his budget-making or spending skills. Maybe his spending column adds up to more than his allowance or earnings for each period. Or, maybe he makes a great budget but just doesn't stick to it.
- You can't afford to make the loan. You may be on a strict budget that doesn't have room for loans to your child. Don't feel guilty. That's just a fact of life that your child will have to learn.
- You'd create problems within the family. Your other children may resent your constant financial underwriting for one child, especially if it comes at the expense of the others. In one family, the mother was always bailing out the baby from financial trouble. Over the years, his siblings grew to resent him for this favoritism.