If you’re going to lend somebody money, consider it a gift. If they pay you back, that’s great, but you should never expect to be paid back.
– My Dad, Sidney Heft
We’ve all been there: a family member calls in the middle of a Netflix binge and wants to borrow money. We might experience a range of emotions that seems to take forever but only lasts seconds. We might be saddened by the thought of this family member enduring hardships. Some of us might feel anger for being asked such a personal question — and still others may wonder why borrowing money is so taboo when the person clearly needs it.
If you decide to lend the money — and not consider it a gift like my dad — it’s probably a good idea to have some kind of a written agreement. Figure out whether the person is going to pay you all at once, or if they’re going to pay you in installments.
You also need to be cognizant of the gift tax. If it’s a large sum of money, check with the IRS guidelines and make sure it fits into the gift tax exclusion. If it’s just a smaller amount, account for it as a gift.
Another sticky situation is when someone asks you to cosign a loan. You have to really know the person that you’re cosigning a loan for. After my daughter graduated from college, her income wasn’t that high because she hadn’t been working long. She wanted to lease an apartment, but needed a co-signer on the lease. I knew that she was responsible, so I wasn’t worried about it. I co-signed the lease for her and there was never a problem.
Meanwhile, I had a client who cosigned a car loan for a long-time housekeeper. They got close, and this woman needed a car, and she needed my client to cosign it. Well the housekeeper ended up defaulting on the loan and disappearing, never to be heard from again. My client got stuck re-paying that loan and it was negatively affecting her credit, but there was nothing she could do about it.
It’s serious business co-signing a loan. Usually if somebody’s coming to ask you to cosign something, there’s a good reason why they can’t get it themselves — so be really careful. Do your due diligence and see if they have the ability to repay that loan.
There is nothing worse than tracking down people who owe you money. It ruins relationships and shatters families. At the same time, everyone falls on tough times and needs a little help at least once in their lives. It is a fine line to walk, and a decision only you can make. May the odds be forever in your favor.