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New Mexico State University

New Mexico State University

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Lending Money to Relatives or Friends is Risky Business

LAS CRUCES -- Lending money to children, friends or other relatives can be a little risky, both in terms of the money itself and the emotions involved, said a New Mexico State University consumer education specialist.

"It isn't the money that causes the problem, it's the fact that the loan changes the nature of the personal relationship," said Susan Wright with NMSU's Cooperative Extension Service. "After the financial transaction, you begin a debtor-creditor relationship, in addition to any other relationships such as parent-child, or friend to friend."

Not every loan transaction turns sour, but enough do that people should think twice about getting involved in such a situation, she said.

The high cost of homes has caused more people to turn to relatives for help with the down payment. Once the decision is made to get into a financial relationship, there are three ways to approach the situation, Wright said.

"The first way to look at the loan is as a gift. The idea is never to lend money to children, other relatives or friends that you can't afford to give to them," she said. "If the money gets paid back, it's a pleasant surprise. If not, no one feels bitter or guilty."

The next approach is to handle the situation in a strictly businesslike way, she said. Put the loan terms in writing -- agree on the amount borrowed, the interest rate and repayment terms.

"The least complicated way to establish a businesslike arrangement with relatives or friends is to cosign the borrower's bank loan, but make sure you are involved in the loan negotiations," Wright said. "Remember, you still have to pay the loan off as the cosigner if the borrower fails to pay."

When deciding to be a lender, consider the possibility that the borrower might default, Wright advised. Borrowing and lending money is a business transaction, and it should be treated as such.