The Bank Of Mom & Dad
BOSTON (CBS) - Should you loan or give your adult kids money? The adult child living at home should find a job no matter how menial so they have their own spending money. They can babysit or mow the neighbor's lawn. You cannot be expected to provide an allowance for a 25-year-old.
What if your adult child wants a loan to pay off credit card debt? If you are feeling generous consider gifting them the money. Or offer to pay for a visit to a credit counselor or a financial planner to help them.
What about a down payment on a house or money to start a business? If you want to loan them the money, only lend them what you can afford to lose. Make sure your current lifestyle would not change dramatically if the loan was never repaid.
If you have other children how does this affect them? Does the more successful child of the family resent the kid who always needs help? Can you or do you want to treat your kids equally. Kids keep score even as adults.
I would suggest making this a formal transaction so the kiddo takes it seriously. So put it in writing and charge them interest. You can get some help here either from an attorney or your accountant to help draw up a loan agreement. If it's a small loan you can find forms and repayment schedules online.
There is a website I found that could also help, Lending Karma. It can help you set up the loan as well as keep track of payments.
You want to charge an interest rate that is fair. Prime is what banks charge their best customers and it's currently 3.25%. If the kids default on the loan you may be able to write it off but only if it was a formal agreement and you reported the interest as income.
What if they ask you to co-sign a loan? If they default on that loan, you are responsible for the debt and it could affect your lifestyle and credit score if you are stuck making the payments on their motorcycle.