|By Liz Davidson|
|Monday, 03 September 2012 17:41|
WITH tightening lending requirements and tough economic times, not to mention the generational phenomenon of helicopter parenting, we’ve been seeing more parents doing something they swore they’d never do – lending money to their children.
For example, according to a recent survey, 20 percent of parents have already gifted, loaned, or co-signed a loan to help their children purchase a home and an additional two-thirds of parents indicated they would like to do so in the future.
But is this really a good thing?
Unfortunately, the reality of family loans is much more stark. They can often become a lose-lose-lose proposition: bad for mom and dad, bad for their adult children, and bad for the economy.
Consider the following:
Adult children who are given frequent loans from their parents are often much less successful than those who are forced to make it on their own and this entitlement from their parents may expand into ultimately tapping into governmental resources to support themselves. This is where family loans can have huge economic ripple effects, creating financial dependence in a society where financial independence is more critical than ever.
Ironically, parents in this situation often end up having to financially burden their children later in life due to helping them too much at the cost of their own financial security.
Almost invariably, these situations have the following characteristics:
3. Both parties are willing to look at this as a business arrangement, sign an agreement on terms, and separate the financial aspects of their relationship from the personal ones. This is easier said than done. It requires maturity on both sides and a willingness to formalize an agreement. We also encourage parents to charge interest as it provides accountability and also protects the parent from opportunity loss since they are not able to invest that money elsewhere for the duration of the loan.
Liz Davidson is CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals.