Things to consider before lending money to the family
It’s the holiday season again, and that means spending more time than usual with your family.
Besides the stress that usually accompanies all that holiday cheer, you may also be faced with another kind of awkwardness: applying for a loan. Maybe your niece needs help paying for her education, or your cousin needs money for a down payment on her condo.
Lending money to family members can be a minefield. Here are five things you should consider before making your decision.
1. Can you afford it?
It can be difficult to watch a loved one struggle financially, but be realistic about your own ability to lend them money. Will lending money mean you have to put some of your own projects on hold? If so, are you ready to make this sacrifice?
2. What will the money be used for?
Even if you have the money to spend, you don’t want to activate bad habits. Only lend money if it is for a specific purpose or purpose that you are comfortable with. Like Suzanna de Baca, Vice President of Wealth Strategies at Ameriprise Financial says so in this Wall Street Journal article, “If you have a parent and you really don’t approve of what they ask or think it will promote irresponsible behavior, you should think twice before paying them any money.”
3. Is this a loan or a donation?
Will the money you give be a loan that you charge interest on or a gift? If it is a loan, the The IRS requires you to charge an interest rate equal to or greater than the applicable federal rate, which is fixed monthly and is generally lower than the market rate. You will also be taxed on any income you earn from these loans.
If this is a gift, keep in mind that you will not be taxed on any cash or assets you donate under the $ 14,000 annual exclusion, or $ 28,000 if you donate. and your spouse give the gift together. If the amount of the donation is more than $ 14,000, you will pay tax on the interest you forfeited.
4. Get everything in writing.
If you do go for the loan, avoid any potential disagreements by getting the loan terms in writing, such as the amount, interest rate, loan term, and repayment schedule. Also, be sure to note each time an amount is refunded.
5. Be prepared to waste your money.
Lending money to the people closest to you is almost always a losing proposition, Jeff Leventhal, chief executive of HighTower in Bethesda, Md., Told the WSJ. Your family members may ask you for a loan because they are looking for lenient terms. So unless you can cope with the prospect of never seeing your money again, don’t take the loan at all.