Page 2 - VAN WIG & ASSOCIATES ALAMITOS HEIGHTS NEWSLETTER ~ JULY 2020

lend to a friend
YOUR MONEY

HIDDEN COST OF LENDING MONEY TO

FRIENDS AND FAMILY

By Carla Fried This is especially tricky with
“Can you afford to never be college loans. Kids determined to
he desire to help loved ones is go to their top choice, regardless
propelled by the deepest and of cost, often need to resort to
T strongest of bonds. And right repaid a penny—financially private student loans, rather than
now, given the high unemployment stick with federal loans that are
let loose by the coronavirus crisis, you and emotionally? safer for a variety of reasons.
may find yourself wanting to help, or Kids can take out federal student
being outright asked to help. loans without a co-signor. But
The decision is, of course, highly Both costs need to be if they want a private student
personal. But to avoid creating loan from a bank, credit union
financial hardship for you (loans not carefully considered.” or online lender, they typically
ALAMITOS repaid) and preserve the relationship, need to bring a co-signor to the
you may want to avoid being led
table. If you’re asked to co-sign a
HEIGHTS solely by your heart, and layer in some other essential expenses is the very to a couple). But above those private college loan, chances are
REAL ESTATE EDGE smart steps to avoid problems down definition of helping someone in amounts you definitely want to the better move is to suggest your
Publisher the line. need. But lending someone money charge interest to stay in the IRS’ child focus on a more affordable
Allison Van Wig Don’t assume it will all just to buy a nice new car? Or buy a good graces, and report the interest college that can be financed with
CA DRE #00985700 work out. A recent survey from bigger house than they could afford as taxable income. federal borrowing.
Cindy Hinderberger Bankrate.com found nearly four in 10 on their own? That seems to cross
CA DRE #01902607 lenders to family and friends say they the line into lending money to help The rate you chose should be no • Can you afford the hit to your
lost money. Perhaps most damaging, with a want, not a need. lower than the applicable federal credit score if you co-sign? Even if
one in five say the relationship suffered. rate (AFR) set monthly by the IRS. the person you’re helping is great
Got a friend or relative who Some good news: It’s very low. In about making timely payments,
BEFORE YOU LEND, repeatedly has come to you for May, the AFR for loans with a term it’s important to understand that
HERE’S A CHECKLIST: help? That might be a sign of of less than three years was 0.25%. the loan amount is still going to
• Will the money come from excess someone who needs an intervention For loans running from three to impact your credit score. It’s added
4435 E Village Rd
Long Beach, CA 90808 savings? Using your emergency to take control of overspending, or nine years the AFR was 0.58%, and to the outstanding credit you have,
fund to help someone else makes too heavy a debt load. The National if you’re lending money for more which will likely cause your debt
562-754-8802 little sense, if it depletes your Foundation for Credit Counseling than nine years, you need to charge utilization ratio (DTI) to rise. If
Allison@superbroker.com savings to the point that you are at is a nonprofit organization that can at least 1.15%. The rate is fixed; you then need to borrow money
www.SuperBroker.com risk if your financial life encounters connect you with local (and legit!) your borrower keeps paying the for yourself, you may run into a
trouble. debt counseling organizations. initial agreed-upon AFR rate for the problem where your DTI is too
life of the loan. high to qualify, or you will be
• Can you afford to never be • Are they willing to make this a stuck with a higher interest rate.
repaid a penny—financially and formal agreement? Yes, you love • Why are you being asked to co-sign
emotionally? Both costs need to each other. Yes, there’s nothing a loan? If you’ve been asked to Then there’s the other credit score
be carefully considered. Sure, you wouldn’t do for each other. co-sign a loan, your first thought risk: The person you’re helping
you expect to be repaid, but That’s not the point. should be: Hey, why can’t they get doesn’t keep up with payments.
6425 Busch Blvd., smart risk management involves the loan on their own? If they are That means you will need to step
Columbus, OH 43229
877.872.3080 challenging yourself to consider When money is involved, a formal borrowing just enough to finance in to make the payments. Or be
www.DiscoverPubs.com the consequence of what happens agreement is how you show a need (say a used car) and yet lack pulled down if there is a default.
if your assumption is wrong. Can respect. A simple promissory note the credit profile to get a good deal According to Bankrate.com’s
Sudoku, Scrabble, Crossword
and articles distributed by you afford the consequence of not might be all you need (a quick web on their own, that isn’t cause for survey, one in five people who
Tribune News Services and being repaid? search will lead you to free forms). alarm. But if they are coming to co-signed a loan said it hurt their
Brandpoint where noted. It should spell out the terms for you because they want to borrow credit scores. n
© Copyright 2020 by
Discover Publications, Inc. • Are you sure you’re really helping? repayments. Technically you can a bigger chunk of money for a
All rights reserved. Lending money so someone can give any individual $15,000 a year want (new car!) that’s enabling ©2020 Rate.com News. Distributed by
make the rent payment, or cover without any tax issues (or $30,000 overspending. Tribune Content Agency, LLC.
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