The smart way to lend money to family and friends? Don't do it!
The ideas are good if you're committed to lending money to relatives (or friends), but I have a better tip: Never lend money to family or friends.
Really. It's just not a good idea. You're mixing business with relationships -- which is rarely good -- and, according to a Money magazine poll, "43% of readers who lent to family or friends weren't paid back in full; 27% hadn't received a dime." Here are a couple alternatives to lending friends and relatives money:
- Give them a gift! Seriously. If 43% aren't paid back in full and 37% don't get anything back, why not just avoid the whole loan business and call it a gift and avoid all the awkwardness and resentment? If you're reasonably well off and want to help your kid get out of debt or buy a house, just give him a gift if you want to.
- Let them earn it. In this economy, a lot of people who are hitting friends and relatives up for cash are unemployed or underemployed, and just looking to put food on the table. Instead of becoming your friend's or relative's creditor, just give him some cash in exchange for some work. Maybe he can help you paint the house, landscape the backyard, or cook/go grocery shopping. If he has time on his hands, this is much more helpful than a loan because you're helping him dig out of a hole instead of adding to that hole with more debt.
Credit card interest rates have generally increased for all major card issuers and even doubling or tripling for consumers who pay their bills on time. Credit cards interest rates are typically pegged to the prime rate, which has fallen from 5.25 percent a year ago to 3.25 percent now. But the national average rate for credit cards has actually risen over that period from 11.3 percent to 12.1 percent.