Why You Should NOT Lend Money to Your Kids

When it comes to lending money to family and friends, the words that should first come to mind for our generation: Don't do it!

The 2011 National Foundation for Credit Counseling Survey says nearly a quarter of Americans asks friends and family for money when they find themselves short on cash or staring at financial hurdles that they can't get over without help. Adult children consider The Bank of Mom and Dad the lender of first and last choice.

STOP! In the name of love — for yourself!

We're at a point in life where we literally can't "afford" what we can't afford to lose. We must think of every money request this way: "What damage is caused in my financial house if I don't get the money back?" If someone you love asks for money that you can't afford to give as a gift or must have back – don't do it. Midlifers don't have time to recover from financial losses.

To lend or not to lend money to people we love?

When Shakespeare said: "Neither a borrower nor a lender be" he was talking about preservation of money and relationships and the importance of maintaining both.

Just talking about money in general stresses people out. Now it's a personal money request. The person asking is your grown son or daughter, often with a legitimate financial need that your money – a loan – could pay for. Loans motivated by and made in good faith can get very complicated and very uncomfortable.

The reality is — loaning to adult children, friends, and family requires a written agreement signed by both parties, including details such as:

• being clear that you expect to be paid back (especially if previous "loans" became "gifts")
• when the loan will be repaid
• what the repayment schedule will be
• what happens if there's a late or missed payment
• amount of interest to be paid
• how to avoid any potential problems with the Internal Revenue Service

If this sounds too much like you're loaning to a stranger for a business rather than "helping out" your adult child, sibling, or other family member, guess what? That's the idea. Money requests among family members for all their many reasons are big business. Billionsof dollars in loans between friends and relatives are made every year; $300 billion in informal loans according to The World Bank. The terms are often vague at best, a repayment isn't spelled out and awkwardness fills the relationship. It's a fact: borrowing or lending money can change the existing relationship. The loan puts the lender on top and the borrower somewhere lower.

It can be tough balancing friendships/relatives and your bank account. If you choose to borrow from or lend money to friends or relatives — you can do it successfully. The real bottom line is — do it right:

• Make a plan.
• Be professional about it.
• Put it in writing.

You might want to consider using the services of an impartial third party to facilitate the loan. Yes, you'll have to pay for the services of a go-between but it would be money well spent. There are websites like Lending Karma that can help you document and track of personal loans, with audited activity on the loan so the status is known by each party ($14.95-$59.95 to set up). Additionally, the National Federation of Credit Counseling has more consumer information on whether to lend to family and friends.

When done right — meaning with rules of engagement and repayment in place — loans between family and friends can benefit both the lender (who gets a competitive return on her or his money) and the borrower (who gets a friendlier interest rate).