Bank of Mom and Dad: Should the helping hand be a loan or a gift?
Some of us have taken a tough love stand: Once they're adults, our kids are on their own: The Bank of Mom and Dad is closed.Others take a more nuanced approach: A helping hand is there, depending on what it's for.For those of us in that camp, the question is: Should that help be in the form of a loan or a gift.The loan would appear to be the less risky way to go. The money will hopefully be repaid and we haven't, as one financial adviser put it, " dampened their drive to become financially independent."Call Paterfamilias and me "Mommy and Daddy Indulgence," but we see the risks of loans as higher than those of a gift.The loan risks? They won't be able to pay it back and there will be bad blood between the banker (Mom and Dad) and the borrower (the adult progeny). A Carnegie Mellon survey published in the Journal of Economic Psychology, looked into the terms and consequences of loans between and among friends and family and found that "people’s tendency to confuse what is in their own interest with what is fair is a major source of disagreements between people.” Put another way, ill will develops between lender and borrower. Relationships suffer.More specifically, the survey of some 900 participants found that overdue personal loans had wide-ranging negative consequences, such as loss of closeness and loss of trust. Lenders felt that the delinquent borrowers were going out of their way to avoid them.Bottom line: If the idea of gifting the money runs counter to your instincts and beliefs, then march your child over to the bank and co-sign a loan. The bank is in the business of collecting on debt. If your child misses a payment or two, let the bank hound them. And if your child defaults on the loan? Well, you're out of pocket, just as you would be if you made a gift.This scenario only works if you can afford to lose the money. If you can't, you probably shouldn't be making a direct loan, co-signing a bank loan or gifting the money.There's a pithy proverb that fills this bill, courtesy of the Bard on Avon: