It was the mid-80s and the heavy metal band KISS had just released a new record (as they were called back then). I was sixteen and completely enthralled with my first case of young love. I wanted that new cassette tape so I could give it to him as a birthday gift; it was my sweetheart’s favorite band.
The only problem was I didn’t have the $8.99 to buy it. I could have turned to my parents, but instead, I opted to approach my grandmother, who I hoped I would be able to sweet talk. Fortunately, that sweet lady was a hopeless romantic at heart and while I seem to be the only one who believes it, I’m convinced I was her favorite. Kids rely on their parents for everything during their childhoods and teen years.
Parents hope they instill responsible financial habits into their kids so that once they’re adults, they can enjoy the benefits of a strong credit rating. Now, though, a new dynamic is emerging and it goes against what some parents taught their offspring about finances.
Money for Nothing
There’s a growing trend in the financial sector and it involves more of a family dynamic than one of a business nature. That trend involves adults who turn to their parents or grandparents for loans. There are several surprising nuances associated with this trend. First, Mom and Dad are more than willing to loan money to their kids if they can afford it. And they’re loaning a lot of money; in fact, some are financing their kids’ mortgages at even lower rates than the banks are charging.
The fact is, with so many economic woes, parents find themselves wondering how their kids can find financial success. Their solution is to give their young an advantage via home loans or cash to pay off college debts so that they can start with a clean slate.
And it’s not just Mom and Dad, but grandparents are getting in on the generosity, too. Studies show that another sub-trend involves young adults who turn to Grandma and Grandpa for financial help. They’re bypassing the parents in some instances because they know Mom and Dad are conserving every penny for their own retirements – and with the hits retirement accounts have taken in the past four years, it’s completely understandable.
If your family is contemplating a “handing over of the cash” ceremony, there are a few things each generation can do to ensure no hard feelings, especially if the waters are muddied when the money’s not being repaid. While everyone knows the old saying about not lending money you can’t afford to give away, it’s often not a realistic adage. These situations can get out of hand – and in a very rapid manner.
Family members considering loaning their kids or grandkids large amounts of money, say, for a mortgage, should draw up a contract that outlines all the details – such as repayment terms, interest rate, etc. It’s probably not likely any parent would turn to legal remedies to force their kids to pay up, but it’s still good business sense and adds a more formal feel to the transaction so that the parameters are better defined.
Also, the lender – as in Mom and Dad, should consider whether or not to bring an attorney into the mix. While you might not think it’s necessary because it’s family, there are more than just the casual terms at play. Title searches, appraisals, etc. are all likely required in your state. Not only that, but there will be legal filings to consider such as ensuring the deed is properly recorded.
So is the Bank of Mom and Dad open for you? One way to find out…
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- Dimon Will Testify in Senate on Massive Loss – May 28, 2012