Page 2 - VAN WIG & ASSOCIATES LAKEWOOD VILLAGE NEWSLETTER ~ JULY 2020
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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
        LAKEWOOD                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
           VILLAGE              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
                                                                                                                               child focus on a more affordable
                                the line.
                                                                  need. But lending someone money
                                                                                                charge interest to stay in the IRS’
               Publisher           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
            Allison Van Wig     work out. A recent survey from    bigger house than they could afford   as taxable income.     federal borrowing.
            CA DRE #00985700    Bankrate.com found nearly four in 10   on their own? That seems to cross
                                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
            4435 E Village Rd   •  Will the money come from excess   someone who needs an intervention   For loans running from three to   impact your credit score. It’s added
          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
           562-882-1581            little sense, if it depletes your                                                           utilization ratio (DTI) to rise. If
          Allison@superbroker.com  savings to the point that you are at   Foundation for Credit Counseling   than nine years, you need to charge   you then need to borrow money
                                                                  is a nonprofit organization that can
                                                                                                at  least  1.15%.  The  rate  is  fixed;
           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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