Family can be a source of love, support, and happiness. It can also be a source of financial assistance. However, if you aren’t careful, adding money to the mix can cause some uncomfortable tension and damage in even the closest relationships. Before you get tangled up in a mess of family and money, learn about the ways you can help family while maintaining positive connections.
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Lending money to family
Making a loan to family members or friends is a common way to provide financial support to someone close to you. To do it right, you need to make sure everyone involved is on the same page. This means creating a written agreement with all terms and conditions to sign. Simply asking for money won’t cut it. It seems formal, but the more formal you make it, the less personal it seems. When it comes to family and money, the less personal, the better.
Should you charge your family interest?
This is totally up to you, but the IRS does have some strong opinions (and taxation rules) concerning interest on intra-family loans. The IRS publishes Applicable Federal Rates (AFRs) every month that establish the expected rates for loans. If you don’t charge at least this amount of interest, the IRS can tax you on what they think you should have charged for your loan.
Additionally, a “loan” with no interest that is over a certain amount is considered a “gift” by the IRS and will be taxed as such.
Bottom line? You should probably charge interest, at least at the AFR.
What if you want to loan to a friend instead of a family member? The same general concepts apply. Make a written agreement, charge interest, and make sure your loan doesn’t end up qualifying as a gift.
Adding an authorized user
Loaning money to family isn’t the only way to help someone out. You can also add a family member or friend as an authorized user on your credit card account. This means that even if they don’t have a score good enough to qualify for a credit card, they can still make charges on a credit card connected to your account.
What is an authorized user?
An authorized user has a credit card with their name on it, but that card is connected to your line of credit. They can make charges, but in the end, you are liable for their payments. As long as you trust them to repay what they charge, this arrangement can work for both of you.
How do you add an authorized user?
Adding an authorized user is pretty simple. Reach out to your credit card company and ask to add someone to your account. They will then send the family member or friend of your choice a card with their name on it that is connected to your account. The family member or friend can then use that credit card like they would use a card of their own.
What are the risks of adding an authorized user?
An authorized user can charge as much as they want. This is fine if they can pay it back, but if they can’t, that debt becomes your problem. Credit card companies don’t care that you didn’t make the charges. As the primary user of the account, you are responsible for any mistakes the authorized user makes. To avoid this situation, write up an agreement with your family member before you add them.
In addition to lending money to family and adding an authorized user, you can assist someone by cosigning a loan for them.
What does it mean to cosign a loan?
Lenders often require a cosigner if a borrower does not have a good enough credit history or credit score to qualify for a loan on their own. Being a cosigner means taking legal responsibility for the loan and its payments if the main borrower can’t follow through.
If you cosign a loan…
Understand that it can be a big responsibility. Make sure you have a thorough talk with the family member or friend who is taking out the loan in the first place. Is this their best option? Do they really have the means to pay it back, or will they end up relying on you? Even if it’s uncomfortable, be as honest as possible and ask all the questions you need to. Cosigning on a loan can be a big endeavor, and you shouldn’t do it unless you think you could handle the payments if your family member stopped paying.
Cosigning for student loans
Student loans can be a huge financial burden for your children or other family members. Sometimes, because of a lack of credit or bad credit, student loans will require a cosigner. This works the same way as cosigning on other types of loans: you sign on to become liable for the payments if the primary borrower can’t pay.
Parent PLUS loans
Unlike student loans for which the student themselves is the primary borrower, Parent PLUS loans are for parents, so they can borrow money to help their children with the costs of university. What’s the problem with Parent PLUS loans? Well, to start, they aren’t eligible for many types of federal student loan relief programs. It’s possible to qualify for some relief options, but expect to jump through some hoops to get there. You may also be repaying the PLUS loans for up to 25 years if you use these options.
Additionally, their interest rates are just as high as regular PLUS loans – currently, they’re higher than 7%. If you’re thinking about helping your child with school, don’t jump on this option before learning more.
What to do if helping family with money has gotten you into trouble with debt
First, know that you aren’t alone. Helping family is one of the top reasons that people get into debt problems. Next, educate yourself on the many options you have for finding debt relief. Here are just a few of the most popular:
Remember, although your family is important to you, you have to weigh your options when it comes to family and money. Don’t risk your own financial future to help someone else and try not to let guilt take the reins. It won’t be easy, but it will be worth it.
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Article last modified on April 17, 2020. Published by Debt.com, LLC