1. Cash Gift
If your loved one is having a short-term cash flow problem, you may want to give an outright financial gift. Determine how much you can afford to give, without putting yourself in financial jeopardy. Make sure it's clearly understood that the money is a gift, not a loan to be repaid. You may want to outline whether or not it's a one time deal depending on the situation, so they don't expect gift giving on the regular.
If you're considering giving them a substantial sum of money, you'll need to keep an eye on the annual gift tax exclusion set each year by the Internal Revenue Service (IRS).
2. Personal Loan
Your family member may approach you and ask for a short-term loan. Talk frankly, clearly write out the terms of the loan on paper, and have both parties sign it. We all know people have selective amnesia sometimes when it comes to repaying loan. Some loan details you'll want to include are:
The amount of the loan
The Obligation on meeting certain conditions (e.g., securing another job or paying down existing debt). Ex: Patrica Brown is receiving x dollars to use towards household expenses and agrees to repay Keisha Jackson $20 a week until paid in full.
The interest rate you will charge for making the loan and how it will be calculated (compound or simple interest)
Payment due dates
A recourse if the borrower doesn't make loan payments on time or in full (e.g., increasing interest charges, ceasing any further loan payments, or taking legal action)
If you are going to lend more than $10,000 and/or you're going to charge an interest rate that is substantially different than the going rate for most borrowers, you may want to talk to a tax professional. There can be unique tax implications for low-interest loans among family members.
3. Co-sign a Loan
Your loved one may be interested in obtaining a loan or to help with short-term financial needs, but what if his or her credit requires getting a co-signer? Would you be willing to co-sign on a loan or LOC from a bank, credit union or online lender?
Before simply saying "yes" and essentially lending a family member your good credit, it's important to realize there are legal and financial implications to co-signing on a loan. Things to consider:
You are legally binding yourself to repay the loan if the other borrower fails to do so.
The lender can take legal action against you and require that you pay the full amount.
Any delinquent loan will also now affect your personal credit.
The fact that your family member needs a loan co-signer means the lender considers them too great of a risk for the bank to take alone.
It may also mean that you could have more difficulty getting a loan for yourself down the road since you are technically taking on this loan and its payment as well.
Before co-signing for a loan, make sure you:
Ask for a copy of your family member's credit report, credit score and monthly budget so you'll have an accurate picture of his or her finances and ability to repay the loan.
Meet with the lender in person (if possible) and be sure you understand all the terms of the loan.
Get copies of all documents related to the loan, including the repayment schedule.
Ask the lender to notify you in writing if your family member misses a payment or makes a late payment. Finding out about potential repayment problems sooner rather than later can help you take quick action and protect your own credit score.
4. Create a Bill-Paying Plan
Most people aren't aware where their money is going because there is no tracking or monitoring. And if they are hit with an emergency or a crisis, it's a fast downward spiral. Budgets are a good thing to have. If you are good at it, you may be able to help your family in creating and using a budget as well.
Or you could task them to come up with a budget first and offer a constructive critique. As you work financial issues and pride can go hand and hand. While some take no issue with asking people for money, some are fighting with their pride in order to do so. Be careful not to paint everyone with one brush.
5. Provide Employment
If you're not comfortable making a loan or giving a cash gift, consider hiring your family member to assist with needed tasks at an agreed-upon rate. Treat the arrangement like you would any other employee – define clearly the work that needs to be done, the deadlines and the rate of pay. Be sure to include a provision about how you'll deal with poor or incomplete work. This arrangement could inspire them to start a business.
6. Gift Cards
If you're uncomfortable or unwilling to give your family member cash, consider giving non-cash financial assistance, such as gift cards or gift certificates. You'll have more control over what your money will be used for, and you can easily buy gift cards in varying amounts at most stores.
8. Help Find Local Resources
You simply may not wish or be able to provide your family member with financial assistance or hands-on help. But you can still play a key role by helping them find local professionals that can steer them in the right direction, such as:
Career counselor and employment agencies
Welfare agencies and similar services
Credit and debt counselors
Lenders who can provide short-term solutions
At the End of the Day
The most important step is sitting down with your loved one and asking specifically what help they need to work their way out of their current situation. From there you'll have a better idea of the type of information and assistance they need.
Family members and money aren't always a good mix. But, in tough economic times or when faced with unexpected emergencies, your loved ones may truly need your financial assistance. Before you commit to helping, be sure to think through what you can and can't afford to do.
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