How to mix family, finances without fights
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
If you travel by plane you've heard the advice every time: "Put on your own oxygen mask before helping the person next to you." That works for money as well as for oxygen!
Should you save someone else's financial life, at the expense of your own? Especially when it comes to dealing with adult children, this is a dilemma that seems to be arising more frequently.
Should you borrow money from your retirement plan to pay for their college? Should you tap your savings for a down payment on a home for the newlyweds? Should you bail your sister out of credit card debt that threatens her family? Should you co-sign your daughter's car loan?
When you lend money to friends and family, you're asking for trouble. And it's not just the financial consequences if the loan is not repaid and turns into a "gift." It's the emotional issues that arise when you watch your relative buy a new car or take a vacation before repaying you.
Put yourself in banker's chair
So whenever I receive an e-mail asking for advice about bailing out a troubled offspring or relative, I immediately take the negative approach. I believe that if a bank won't lend money to your son, daughter, brother or sister, you shouldn't put your own hard-earned dollars on the line.
It's a tough analysis, because lending money to a relative is not a financial decision; it's an emotional one. And with so many people incapable of simply saying "no" to a relative in need, I'm asking you to consider carefully the proper way to handle this kind of transaction.
It's very important to legally define and document the terms, interest rate and repayment schedule. Those simple steps can affect your own finances and taxes as well as your peace of mind.
Fortunately, there's now an easy way to get help in structuring and managing a private, personal loan.
A Massachusetts-based online company called Circle Lending (www.circlelending.com) offers a solution for people who want to make these private loans in the correct way. Circle Lending will do all the documentation for a flat set-up fee ranging from $199 for an unsecured personal loan of any amount, to $549 for a mortgage made between individuals. That fee includes recording the mortgage loan against the title.
It's worth paying these fees. Circle Lending will create the appropriate documents to be signed in order to keep this transaction at arm's length for both parties.
It will help you determine the appropriate interest rates, and then it will calculate the monthly payments, even determining the amortization of a mortgage loan.
But Circle Lending will take the process a step further. For a fee of $9 per payment, it will actually collect and process the payments if they're made through an automatic deduction from the borrower's checking account. The borrower receives an e-mail reminder a few days before the debit is made. Then the money is electronically deposited in the lender's account. (Circle doesn't earn money on the funds during the transaction.)
The process is transparent, but private. Circle tracks the interest and principal payments, and securely posts a statement of payments online for both parties to follow. It also will send a year-end tax statement, which is especially important with a mortgage loan, so the borrower can deduct the interest for taxes.
Jim Smith, marketing VP for Circle Lending, says, "Using an independent third party to document and collect the payments takes some of the emotion out of the transaction. That's where we really add value, as well as taking the administrative -- and mathematical -- hassle off your hands."
Recalculating a prepayment
Don't underestimate the value of this assistance. If the borrower wants to prepay a portion of the loan, Circle Lending will do the calculation to reduce the balance. And it will help with documentation if you decide to turn a portion of your loan into a "gift" at year-end.
Remember, if your loan to a family member is properly documented it can be deducted as a bad debt if it is not repaid, subject to certain limitations.
Shakespeare said, "Neither a borrower, nor a lender be." I'd add to that, "Especially when it comes to family."
But if you are going to make a family loan, doing it correctly will save a lot of financial and emotional heartache. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.