Borrowing money is never simple, but when you borrow from friends or family members, it also has the potential to destroy relationships.
Tarah, a working mom in the Midwest in her early 30s, struggled with whether or not to help her parents buy a new car while she and her husband were trying to pay off their own debts. She ended up deciding not to help. "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. She says her decision created family tension.
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.
Experts offer these strategies for cross-generational lending:
First, decide if you can afford to give help. An Ameriprise Financial survey found that many baby boomers didn't realize how much the help they were providing cut into their own retirement savings. About 30 percent of baby boomers said the money they gave their adult children negatively affected their own retirement savings, but most were unaware of the impact.
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 30-something 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 more than $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.
Consider what might be expected in return. Donald Cox, professor of economics at Boston College, says that people who give or lend money to relatives are usually motivated by altruism, but sometimes something is expected in return. For example, if parents give money to their child for a down payment for a house or college tuition, they may expect assistance later. "Many adult children who are providing care for needy, elderly parents say they are doing this out of a sense of reciprocity," he says.