I recently heard a story from a friend about planning for her son’s wedding. I won’t go into details, but basically, there is tension surrounding the funding of the wedding. The general rule of thumb on family and financial matters, especially in loaning money, is just do not do it. I don’t necessarily subscribe to this advice, but I do think that it is up to the borrower (in most cases the offspring) to make the situation run smoothly more so than the lender. A loan between parent and child can be beneficial to both in the form of a better return for parents than other options and a lower interest rate for the son/daughter.
If the money received is a gift, whether for a wedding, school, house, or anything else, there are also certain behaviors that should be followed. This seems obvious, but anyone that has gone through a wedding and knows that average wedding costs are approaching $30,000 knows that what the bride and groom want and what the parents can afford may be far apart. Given this, it is, again, up to the borrower to make this a smooth transaction.
Accepting a Loan from Parents
The Do’s
- Research current rates from banks and be aware of current options
- Negotiate the terms just like you would approaching a bank – this includes interest rate, term length, and amount down.
- Once agreed, create an amortization schedule – there are many calculators online. I like this one because it shows the full schedule breakdown.
- Set the start dates for payment.
- Pay on time every time. Most banks allow automated payments through a bill pay option online. Set it up to go directly to your parents a few days before the expected payment date.
- Be grateful that your parents are in a position to give you a loan that has better terms than any bank and that you can feel like you are paying back your parents for raising you.
The Do Not’s
- Miss a payment.
- Complain about the terms.
- Ask directly or insinuate that your parents should forgive the debt because they can “afford it”.
If you feel you cannot abide by these rules, seek a loan elsewhere or seriously analyze if you need the item that you are seeking a loan for. If you enter into a loan and find that you cannot stick to the rules, seek a loan from a bank and pay your parents back immediately. If you get off track or expect your parents to relax the loan rules, the relationship will become strained and tensions will rise.
Accepting a Gift from Parents
The Do’s
- Be grateful that your parents want to help you in any way.
- Decide if the amount given will cover what you are looking to purchase. If not, seek a more affordable option or look at your finances to see if you can cover the difference.
- Thank your parents.
The Do Not’s
- Ask for more money.
- Complain about the amount of money.
- Think you are somehow owed this amount from your parents.
Nothing makes gift giving worse than if the recipient does anything but accept it graciously. As the recipient, know that what your parents are giving you is truly what they can afford and are happy to give to you. Furthermore, if they had more, they would likely give you more and asking or insinuating that they could somehow do so will surely deflate the spirit of the gift and make tensions run high. Again, if you feel that you cannot abide by these rules, refuse the gift and check your finances for alternatives.
Hopefully, this short guide will help facilitate successful money transactions between parents and children. It can be done with the right mindset. Just make sure you can handle it before getting into the situation.
How do you feel about parents loaning money to children? Do you have other guidelines to help the sons/daughters make the experience a positive one?