Big Decisions: Loaning Money to Your Kids
To loan or not to loan, that is the question. To the parent of a teen, the question is a familiar one. From new clothes for a special date to a trip to the movies with friends after allowance has run out, childhood presents no shortage of opportunities to ask mom and dad for money. So what’s a parent to do? It depends on who you ask.
The Case for Just Saying “No”
A recent study by NerdWallet found that Americans are currently sitting on more than $911 billion in credit card debt. And yet the typical home has three TV sets, two cars, and spends $161 per month on clothing. The stats tell quite the story: for most Americans, a lack of stuff is not a problem. Rather, a lack of restraint when it comes to spending.
The argument against loaning money to your teen is quite clear: rather than getting a bailout from mom and dad, it’s more valuable to teach your child to save, plan ahead, and stop spending when their money runs out. Chances are, when payday finally hits or allowance day rolls around, their “must-have” item will have lost its luster. And if not, the wait will have made the purchase even sweeter.
The Case for Making the Loan
There’s another side to this story: some argue that protecting your child from a world in which loans and credit cards are a way of life is a recipe for financial ruin. Teens unaware of the effects of interest rates, payment plans, and late fees are more likely to fall for too-good-to-be-true credit card offers and predatory lending. Giving your teen a chance to stretch their financial muscles by learning how keep track of loan payments, while learning what it feels like to continue paying for something days or weeks after the thrill has worn off, is a valuable lesson indeed.
But more than just acting as a teaching moment, for an aspiring young entrepreneur, a parent loan can also empower a teen to launch a business. Getting a bank loan is difficult-to-impossible for minors, which can be a significant hurdle for businesses dependant on equipment or supplies. By offering your teen an advance, they could turn your funds into an entrepreneurial future.
Getting Practical
So you’ve decided to loan your teen some cash, have you? It’s time to get practical. The most important thing to keep in mind is clarity. Be clear about what your child owes, how much interest (if any) you’re charging them, and when each payment is due. Finally, what collateral are they putting up for their funds? To truly replicate reality, a missed payment or unpaid balance should result in more than mere talk; perhaps that beloved skateboard will be revoked until payments are back up to date. With plenty of clarity, and careful follow through on the part of your teen, a parent loan can be excellent preparation for financial independence.
Need a loan-themed laugh? Enjoy this clip from Biz Kid$:
