Lending Money: Yes Or No?

   Plenty of people are coming up short in their finances as the end of the year — and the holidays — approach. Some of those, unfortunately, may be family or friends you know and care about. Adult children’s needs and wants are especially hard to consider — not only do you want to know the mortgage is paid, but you’d hate to see your grandson lose out on that great new computer he’s been wanting.

 What to do?

It’s difficult to decide, especially if you have extra to lend only because you were careful, frugal and kept yourself from spending too much all year — and they didn’t.

Add the blinding ties of love and affection, and it’s even more difficult. Three questions asked up-front will help clear away the fog:

*Can I afford it? Are my bills paid, and extra money set aside for holiday gift-giving? Have I covered my own commitments for loans or credit card payments? If the answers to any of these are ‘no,’ you’ve got no business loaning money.

*Can I afford to lose it? What if your friend pays the money back much later — or never? Don’t assume that they will keep their word. (We know this firsthand – one daughter needed her rent ‘temporarily’ covered, and promised to send a check in a week. She finally did — 2 1/2 months later.) Which brings us to:

*Can I trust this person? Will they do what they say…and how do I know?

Sometimes the answer isn’t a loan at all. You pass on some of the extra you were privileged to have, and never expect a cent in return. Even a small gift helps encourage a friend who’s out of work, or a parent whose bills are covered, but little else. (The small-but-regular checks sent to our Mom, who lives off her savings and Social Security, are ‘putzing-around money:’ extra cash to take friends out to lunch now and then.)

If you do decide to loan the money:

*Get it in writing. How much, paid back when, in what increments? If you both sign the agreement, and keep a copy, there’s no fuzziness or questions later on. Without paperwork, the IRS can argue that your ‘loan’ was actually a gift, and tax you for it. (Gift limits this year go up to $13,000 per person; in 2014, they’ll increase to $14,000.)

*Charge interest. According to the Feds, your interest has to be above the ‘Federal Applicable Rate.’ As of Nov. 1, 2012, it wasn’t much: as little as .22%, up to a little over 3%. But still. (Go here for the tables.)  Most states have caps on the amount of interest that can be charged, anyways. (A good thing to know if you’re on the other end, looking to borrow money, instead.) 

That interest, by the way, is considered income by the IRS, and needs to be declared.  (A good overview on loaning money is here.)

*Don’t take it personally. This is the hardest part of the deal. The friend with the best intentions may be the one who never follows through. We know this one from hard experience, too. The daughter and son-in-law of good friends took money from us — funds their parents promised to repay, in exchange for not pressing charges. All of our dealings with these people over more than two decades suggested that their honesty was sterling. (I would normally have trusted their daughter, too — in fact, that’s what got us into this mess, to begin with.) Gone: nearly $1750 worth of silver dollars.

We did get $250, at first. It was also the last. They don’t contact us anymore.

What a waste of time, money and heartache.