One of the first places many individuals go for assistance during difficult times is to their family and close friends. People often find themselves in financial trouble if they suffer a sudden loss of employment or are burdened by high medical expenses. Many well-intentioned family members have found themselves drawn into the financial pit by a loved one’s issues.
Let’s look at a few methods you may take into account to assist your family members who are having financial difficulties without endangering yourself in the process.
KEY LESSONS
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- Consider if a loved one’s financial difficulties are short-term or ongoing, and whether they have a strategy in place to prevent falling into the same traps again, before determining whether to provide assistance.
- If you do decide to assist, make sure you and the individual have a clear understanding of the assistance’s nature—such as a gift or loan—as well as any conditions for return.
- If you want to give the person something straight up, think about paying one of their bills for them, giving them cash, giving them gift cards, or giving them resources they will need.
- If you can, think about getting them a job, helping them set up a budget, or connecting them to neighbourhood services like training or career counselling.
- If you want to assist them with a loan, think about providing a personal loan or offering to co-sign for one they are applying for from a bank or other financial institution.
- Present money
You might want to give an outright monetary gift if your loved one is experiencing a short-term cash flow issue. Decide how much you can afford to give without putting your finances in danger, and then either give the entire amount at once (and let your loved one know that’s the case) or maybe give smaller gifts on a sporadic or regular basis until the situation is resolved. To avoid putting the recipient of the gift in an awkward situation, make sure it is understood that the money is a gift and not a loan that must be repaid.
If you’re thinking about giving them a sizable sum of money, you’ll want to be aware of the Internal Revenue Service’s annual gift tax exclusion, which is set each year (IRS).
2.Take out a personal loan
You might be approached by a relative who requests a short-term loan. Have an open discussion, clearly spell out the loan’s terms in writing, and have both parties sign it. This will make sure that everyone understands the terms of the financial agreement so you can prevent financial dispute. You should mention the following loan information.
- The loan’s principal amount
- Whether the loan will be paid back in one single amount or in a series of payments if certain requirements are met (e.g., securing another job or paying down existing debt)
- The amount of interest you will charge and how it will be calculated (compound or simple interest)
- dates for payments (including the date of full repayment or final instalment due)
- If the borrower doesn’t make loan payments on schedule or in whole, there is a remedy (e.g., increasing interest charges, ceasing any further loan payments, or taking legal action)
- If you plan to lend more than $10,000 or if your interest rate will be much higher than that of the majority of borrowers, you may wish to consult a tax expert. Family members taking out low-interest loans from one another may have special tax ramifications.
3.Cosign a Loan
For short-term financial requirements, your loved one could be interested in acquiring a loan or line of credit (LOC), but what if their credit necessitates having a co-signer? If a bank, credit union, or internet lender offered you a loan or line of credit, would you be prepared to co-sign?
There are legal and financial repercussions to co-signing on a loan, so it’s crucial to understand them before blithely responding “yes” and effectively giving a family member your excellent credit. The most important thing to realise is that you are legally obligated to pay back the loan even if the other borrower doesn’t. Even if you and your family member had an agreement that you wouldn’t be required to make payments, the lender may still file a lawsuit against you and demand that you pay the whole amount ,which is when you need help from the lawyers.
Your personal credit will now also be impacted by this past-due debt. Therefore, if your sister, brother, or uncle does not pay the loan back in full and on time, the lender may report this to the credit agencies to be included on your credit report, which might damage your credit score.
Loan co-signing is a significant matter. Your family member’s requirement for a co-signer on a loan indicates that the lender believes they pose too significant a risk for the bank to assume on their own. What assurances do you have that they will return the loan if the bank is unsure? Since you are technically taking on this debt and its payment as well, it can also imply that you would later have greater trouble obtaining a loan for yourself.
Prior to signing as a cosigner for a loan, confirm that:
- To acquire a complete picture of your family member’s finances and capacity to repay the loan, get a copy of their credit report, credit score, and monthly budget.
- If at all feasible, meet with the lender in person to ensure that you fully comprehend the loan’s conditions.
- Obtain copies of any loan-related paperwork, such as the repayment plan.
- If a member of your family is late or skips a payment, request that the lender tell you in writing. Early detection of possible repayment issues will help you take prompt action and safeguard your own credit score.
- There is a chance of getting caught in a cycle of loans and payments when helping out a loved one who is struggling financially; to prevent this, make sure the terms and structure of the loan or gift are spelt out in detail beforehand.
- Establish a payment strategy.
People who are experiencing a financial crisis frequently have no idea where their money is going. If you have prior experience creating and following a budget to manage your own finances, you might be able to assist your family in doing the same. You might want to offer to show them your budget and bill-paying system and explain how it helps you make financial decisions as a way to start a conversation.
The process will highlight areas where they can reduce spending or try to increase their income to better meet their financial obligations as you work together to help them get a handle on their financial situation.
5.Create Employment
If you don’t feel comfortable lending money or giving a gift of cash, think about hiring a relative to help you out with necessary tasks for a fixed fee. This additional income might go a long way towards assisting them in meeting their financial obligations while also assisting you in finishing any unfinished tasks. Treat the agreement like you would any other employment relationship; be specific about the tasks to be completed, the due dates, and the compensation rate. Include a clause outlining how you’ll handle subpar or unfinished work.
Realize that your time, patience, and capacity to assist your financially stressed family member in problem-solving and brainstorming are equally essential resources you may provide if you are unable to give or loan them money.
- Offer Support Other Than Money
Consider providing your family member with non-monetary financial aid, such as gift cards or gift certificates, if you feel uncomfortable or hesitant to offer them cash. You can simply purchase gift cards in various denominations at most places, and you’ll have greater choice over how your money is spent.
7.Prepaying bills
To assist your loved one through their present financial hardship, you may wish to think about paying one or more monthly expenses (such as rent/mortgage, energy bills, or insurance premiums) in advance. Offering to assist them escape a short-term disaster and give them the additional time they need to resolve their predicament might be as simple as paying their automobile loan.
- Aid in Locating Local Resources
Simply put, you may not want to or be able to provide your family member financial support or direct aid. However, you may still have a big impact by assisting them in locating regional authorities who can point them in the proper way, like:
- agency for job and career counselling
- Welfare organisations and related services
- Counselors for debt and credit
- Lenders who are able to provide quick fixes
