It's a natural inclination for parents to want to help their adult children when they run into financial troubles. Job loss, medical bills, housing crises and other issues can weigh on adult children, and parents who are in the financial position to help may willingly do so. However, loaning money to children, especially if the amount is substantial, should not be taken lightly. There are several considerations parents should weigh before extending a loan, both to protect their own financial status and ensure their children use the funds wisely.
First and foremost, parents should consider why their children need the funds. While they may request money to pay off a large credit card bill, parents should inquire why they are in this type of debt. Are their large balances the result of tough financial times, or irresponsible spending? These reasons matter, because parents will want to make sure they are not making a mistake by lending money to their kids. In other instances, parents who recognize that their children's financial troubles are a result of their spending habits may offer up other avenues that can help them break these poor patterns, such as credit counseling.
Parents should also draw up a loan contract to outline the terms of the financing. This will not only give borrowers guidelines to follow, but can also help parents ensure they are adequately protected. Loan contracts should be similar to those drawn up at banks, and include the details of the transaction, such as the loan amount, interest rate, payoff period and provisions about default. This can help draw clear boundaries and demonstrate to kids that the financing is really a loan and not a gift.
Lastly, adults may consider looking for ways to help their children manage their funds better. While there is a fine line between getting too involved in a child's finances and helping guide them toward smart financial decisions, providing some advice can be helpful. For example, parents who are loaning money to kids to help them cover a credit card debt can also suggest other ways of managing the payments, such as negotiating the interest rate, paying off high-interest balances first and finding ways to cut down on their monthly expenditures.