After her parents' car broke down earlier this year, Tarah, a 28-year-old working mom in the Midwest, struggled over whether to help buy them a new one. She and her husband were working hard to stick to a five-year plan for paying off their own debts.
So she told them she couldn't. "I don't want to think about dealing with that while I'm trying to stay focused on getting out of debt," says Tarah, who asked that only her first name be used.
As more families come under financial pressure, Tarah's dilemma—to help or not to help—has become increasingly common. According to Fidelity, 10 percent of generation X-ers provide financial support to their parents or in-laws, and the average amount is about $3,500 a year. Eric Cramer, a financial consultant at Charles Schwab, says that the credit crunch has turned family into "the lender of last resort."
Experts offer these strategies for cross-generational lending:
- Consider saying "No"—firmly. Declining a request for help, while painful, is sometimes the best decision a person can make, especially since many loans never get paid back. The top priority needs to be staying solvent oneself, says Ted Beck, president of the National Endowment for Financial Education. If a relative asks for money unexpectedly, you should stall, suggest Jeanne Fleming and Leonard Schwarz, authors of Isn't It Their Turn to Pick Up the Check? "What you blurt out may not be the best answer," Schwarz says. Then, be sympathetic but firm. "You want to be unequivocal. Don't say, 'This is a bad time,' or they'll ask you again next week," Fleming adds.
- Look for nonmonetary alternatives. Tina Kimball, a 32-year-old administrative assistant in Dayton, Ohio, loaned her parents her car when an accident left theirs unusable. If the situation worsened, she says, she would invite them to live with her family. Kimball says she wishes she could give them money, but with her own family finances under pressure, she's doing the most she can.
- Put all loans and gifts in writing. Relatives lending over $1,000 should draw up a simple document describing the terms of the loan, including the interest rate and schedule for repayment, recommends Jennifer Streaks, a financial services attorney in Washington, D.C. In addition to preventing misunderstandings, the paperwork can be important for legal reasons, too. This year, amounts over $12,000 are subject to gift taxes, and unless a certain interest rate set by the Treasury Department is charged—currently 1.63 percent or higher—loans could also be considered gifts.
- Get help online. For a fee, peer-to-peer lending sites such as Virgin Money allow friends and family to formalize the loans they make to each other. By establishing a repayment schedule and enabling automatic payments, family members don't have to worry about nagging each other over late payments. Virgin Money has experienced a 35 percent increase in loan volume over the past six months.
Tarah says the best thing she can do for her family is to avoid repeating her parents' financial mistakes. That way, she says, she can avoid becoming a similar burden to her own children one day. l