When an adult child requests a loan

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Parents who loan their adult children money need to consider how this may become damaging for not only their offspring’s finances, but also their own.

Many young adults seek financial help from their parents if they encounter difficulty securing enough money for a down payment on a new home or some other major expense. However, there are times when well-meaning loans can burden offspring in the future, and if not paid back, can cause great anguish for a family.

When parents help out their children by paying off their credit card or personal loans, the child’s credit rating remains unblemished. This means that they can borrow again without understanding their financial obligations.

Lending children large sums of money for a deposit for a home can also influence the bank to wrongly believe that they’ve saved the deposit and their finances are robust, and therefore lend them significant amounts of money. For children with a habit of accumulating wealth and no discipline when it comes to paying loans, they must face the burden of repayments.

Since quite a few tax traps and legal pitfalls can arise when a loan agreement doesn’t work out, parents should also consider the implications of lending money to their children before doing so.

Proper documentation of a loan can avoid many complications. For example, if the child receiving the loan was to divorce from their partner, a written document identifying who handles the repayments can prevent the former partner from refusing to share the responsibility of the repayment.

For tax purposes, parents should also include a repayment schedule, repayment records and a plan that determines how the loan will be repaid as scheduled. If applicable, parents should also include proof that the child was credit-worthy when the loan was originally made.

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