What to Think About Before You Lend Money to Adult Children

There are many reasons why you may want to lend money to your adult children. You might want to help them afford a major purchase, such as a home or a car. You could be looking to give them some assistance in paying down their debt. You may be lending them money to make ends meet or to make it possible for them to afford child care or birthday presents for their own kids (your grandchildren).

Whatever the reason, many people lend money to their children in adulthood. This is especially true today, when the cost of living continues to increase, as does the amount of consumer debt that people have.

However, before you lend your children money, there are some things that you should think of. Here is what you will want to consider before you lend money to your adult children.

You may want to help, but you should never lend money to anyone (not even your own children) if you can’t afford to be without the money. If you’re not financially secure, and if you can’t afford to go without the money that you’re lending, then you should not provide the financial assistance. It’s obviously hard to watch your child experience financial hardship but will also be tough for both you and your children if you lose your house, can’t afford to retire, or end up in another serious financial situation.

Lending money that you do not actually have is a big reason why many seniors struggle with debt. They want to help their children, but they are often too generous and put themselves into debt trouble in the process. Don’t lend money that you don’t have.

If you can afford to lend your adult children money, make sure that it’s 100% clear what the loan is for. There is a difference between lending your child money to buy a car so they can get to and from work, and lending them money to buy a new entertainment system, even if you’re talking about the same amount of money.

Make sure your child knows why you are lending them the money and how you expect the money to be used. It’s okay to say no to lending money if you don’t agree with how the person you are lending it to will spend it. It’s also okay to say no if your child has a history of spending money unwisely. You don’t need to write a blank cheque for your child and, in many cases, doing so will hurt both of you more than it will help.

It’s critical that both you and your child understand the “terms” of the loan you’re providing. You can write up these terms officially if you want, or you can verbally agree to them, but it’s important that a discussion around the terms happens.

First of all, you’re need to specify if the money is a loan or a gift. If you’re loaning your child money, that means you expect that it will be paid back. If you expect that it will be paid back, when do you expect this to happen? Do you want your child to give you monthly payments for a certain period of time? Or is it okay if they give you a lump sum at a later date? When should the loan be paid off in full? Are you charging interest on the loan? Is there any incentive for paying it back early? You may not think that you’ll need to go into this sort of depth when you’re lending money to a family member but doing so is important.

You don’t want there to be any misunderstandings with the loan, as these misunderstandings can lead to fights which can seriously hurt your relationship.

If you’re lending your child money to pay off their credit card debt, are you actually helping them? Or will they go into debt again shortly? Before you lend your child money, consider the overall situation. Does your child get into debt trouble frequently? If they do, and if they count on you bailing them out each time, then lending or giving them money may not be helping.

Instead, they could be better served with some advice and guidance, either from you or from a licensed financial professional.