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Five tips on lending money to family or friends

September 16, 2012|By Scott J. Wilson, Los Angeles Times
  • Lending money to loved ones can be tricky.
Lending money to loved ones can be tricky. (J. Scott Applewhite, Associated…)

If you have friends or family members who are hurting financially, should you lend them money? Some tips from the National Foundation for Credit Counseling:

Don't lend the money if you can't afford to lose it. "Loaning money to friends or family is a gamble, so never make a loan if it's going to put your own financial situation on the skids," the NFCC said. And don't tap your retirement savings. "Protect this nest egg as though you were the mother hen, and don't let any of your chickens touch it."

Involve your spouse or partner in the decision. "If you and your spouse don't agree on making the loan, it could result in significant stress on your relationship," the NFCC said.

Consider how the person got into financial trouble. "Do they want the loan because of an emergency like loss of job or unexpected medical bills, or because they made poor spending decisions?" If it's the latter, giving them more money won't help unless they address the underlying behavior, the NFCC said.

Be clear on the terms of the loan. Put the amount, interest rate, due date and late fees in writing. Have both parties sign. "Consider having the documents notarized, as this will give you more legal standing if the borrower defaults," the NFCC said. If you intend to pursue legal steps in the case of a default, be sure the borrower understands that upfront.

Consider tax implications. "The IRS frowns on loans that charge little or no interest and may require you to pay a gift tax," the NFCC said. If you're lending more than $10,000, consult a tax professional. If the borrower fails to repay you, keep a record of your efforts to get the money back, so you can take a tax write-off.

scott.wilson@latimes.com

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