FINANCES Keeping funds in family?

Experts advise that loans to relatives should come with a contract.
DALLAS MORNING NEWS
Bettye Banks loves her family and stands ready to help them in their time of need.
But when it comes to lending them money, she lays it on the line:
"Yes, they're family and yes, you love them," said Banks, who has lent money to family members about 35 times. "You demonstrated that when you gave them access to your money. Their demonstration to you that they love you is when they pay you back."
To ensure that her family members repay her, the Dallas executive draws up a loan contract spelling out the terms, such as the interest rate if they miss a payment.
"Let them know, 'Of course you're my family,'" Banks said. "'Of course, I'll help you, but I need this back."'
In this tough economy, the issue of lending money to family members may be on a lot of minds. The crucial question is: Should you do it?
Potential for strain
"Loaning money to a family member is fraught with peril and potential for strained or broken relationships," said John Evans, a certified financial planner in Atlanta.
"Every other option should be exhausted before it comes down to family loans, because it's too dangerous for family relationships."
Most experts say you shouldn't lend money to family members if you can avoid it because of the likelihood that emotions will become entangled with money.
"There's a major disconnect between emotional and financial decisions, and nowhere is it more apparent than in the lending process to family members," said Viktor Szucs, a certified financial planner at Quest Capital Management Inc. in Dallas.
"People lend with their hearts to family members, and that's why the loans end up being nothing more than gifts."
Outstanding loans
More than 7 million person-to-person loans are outstanding among friends, relatives and peers at any given time, says Jill Miller, vice president of marketing at CircleLending in Cambridge, Mass., which helps formalize such loans.
"This represents over 4 percent of the $1.5 trillion consumer credit market," she said.
Experts aren't telling consumers to be selfish and cold-hearted toward their loved ones. But they say lending money to relatives is a serious matter, and there are questions you need to ask before writing that check.
"The first question is: Is this something I can do reasonably without putting myself or my family at risk?" said Sandra J. Dixon, a tax and estate planning attorney at Jackson Walker LLP in Dallas.
Second, is this money you can afford to lose if your relative can't repay you? Would you be able to withstand it emotionally as well as financially?
"If you can't stand it either way, you shouldn't do it," Dixon said.
Because of the damage to family relationships that an unpaid loan can cause, personal finance experts say you should consider just making an outright gift to your relative.
Gift or loan?
"More often than not, we recommend clients make a decision on whether they should be gifting or making a loan," Szucs said. "Will they have a way of enforcing the loan if it's not repaid, or feel comfortable about forgiving it, should the family member be unable to repay?"
If you decide to lend the money, experts overwhelmingly say that you should formalize the transaction by drawing up a contract.
This may appear cold-hearted, but it can actually benefit both the lender and borrower.
"I just see too many of them that are never paid back," said Curt Leonard, first vice president at Merrill Lynch in Irving, Texas.
"If you are going to do it, you do need to follow some guidelines. You need to keep it structured and formal using some sort of loan agreement that you've drawn up."