Families: Finances: Giving a Helping Hand

• Share

(2 of 3)

Many lenders commit what experts say is the biggest error: borrowing money from a credit card or bank on someone else's behalf. If the borrower stops making payments, the person who signed, or even co-signed, for the loan has to make good on the debt. "We have seen with some frequency individuals who are left holding the debt for someone else's mistake," says Joel Greenberg, president and CEO of Garden State Consumer Credit Counseling Inc., a nonprofit financial-counseling service in Freehold, N.J. "It's a story that never goes away and happens very, very often to our clients."

But if, despite all these cautions, you're still considering a family loan, there are things you can do to avoid pitfalls, experts say. One of the newest options is to contract with a loan-servicing company. That's what Roger Jusseaume did. Seeking to protect his significant investment, he hired CircleLending, based in Cambridge, Mass., to manage the loans he gave his nieces and nephews. "I looked at what the company offered and decided it would be a great way to protect both sides," he explains.

CircleLending charges a small setup fee and a percentage of the original loan amount for its services and handles every aspect of the lending experience, from drawing up formal promissory notes to collecting payments each month. Asheesh Advani, the company's president and CEO, says his firm has facilitated more than $2 million in loans since it was launched in May 2000.

Those who don't want to be confined by such a formal agreement can still benefit from drawing up a legal document on their own. These agreements should include such payment terms and conditions as the interest rate, repayment schedule and consequences for late payments. "Unless you have a legal document, it's very hard to force an issue and recoup money lent to family members," says Garden State's Greenberg. "You should never lend money without some form of written document and the understanding that the person has the means and ability to repay you."

Still, there is one step that should come even before any legal documentation: emotional accounting. Financial Psychology Corp.'s Gurney cautions her clients that they should have a face-to-face meeting to discuss their feelings about such a loan. "If you have to borrow or lend, you have to take the emotions out right away and make it a business deal," says Gurney. "Everything has to be put on the table, including fears, trepidation, the risks involved. How people deal with those initial feelings really speaks to whether a loan is going to work out well in the end."

Gurney says such discussions should include what the borrower will use the money for, since one family member's necessity may be another's frivolity. She also advises lenders to ask themselves if they can emotionally and financially afford to lose the money involved. Finally, lenders should prepare for the possibility that news about their generosity will reach other family members and breed resentment or trigger requests for additional loans.