Key Takeaways
- Whether you’re loaning your pickup truck to help a friend move, or loaning out money, how you do it can mean the difference between a bad and good experience.
- When you consider loaning money, how or if you decide to do it depends on the details.
- When the amount the person in need requires is an amount low enough that it wouldn’t bother you to never get it back, it’s probably fine to go ahead and be there for your friend.
- When the amount needed is much larger, such as when trying to help a child or grandchild purchase a home or other item with true value, you might consider acting as a family bank. In this case, you would loan the money and receive the payback with interest, per IRS rules.
When I was in my early 20s, I had a Ford pickup truck. I really liked that truck—until I didn’t like it. What happened? Well, it seemed as if every other weekend somebody borrowed my truck for a move. Eventually, they started to wreck my pickup, so I started to go and help people move, rather than just lending out the vehicle.
Actually participating in helping these people move may sound kind of extreme and it was not a fun experience. Likewise with lending money. I still remember a person who, in effect, stole $500 from me. I’ll never forget it. And depending on your situation, $500 might be a big amount or a small amount of money to lose. Even 50 bucks might be too much, or maybe you’re doing pretty well and $1,000 is a small amount to you.
Whatever that amount happens to be, there are two circumstances under which you might consider lending money:
The first is a situation where you decide that parting with anything less than X amount of dollars doesn’t really concern you. Given that amount (whatever the number happens to be for you), someone you know may have a particular financial need, which fits within that boundary. You could help the friend out by simply loaning the money (whether you get it back or not) and being there for them.
The second circumstance arises when someone you know needs a larger sum of money—more than you’re willing to lose. In this case, when you loan the money, you’d actually charge interest, payable as you receive the money back. This setup is particularly effective in intra-family loans.
We find that families of means can actually serve as the bank when trying to help their children or grandchildren purchase homes or other things with actual value. In other words, they can lend their loved ones the money and do it on very favorable terms, such as interest-only over 30 years. You may wonder, “How can you do that?”
Turns out, the IRS has rules and accompanying tables, which basically state that as long as the loan is done at a certain interest rate and within certain guidelines, it will be acceptable. In other words, you can provide a more favorable rate and terms than are available with for-profit financial institutions.
Now you have two situations where we’d advise it’s okay to lend money. The first is where the amount of money is low enough that it doesn’t matter to you. Second is an intra-family loan or other kind of personal loan where you actually get something back, meaning there’s a valuable transaction taking place. Consider this the next time you’re faced with the possibility of lending money, or, if you’re like me, lending your truck. Until next time, enjoy.
Gary
