Borrowing from your parents (the Bank of Mom & Dad)

When you get caught in a money emergency or if a financial opportunity comes along, you need ready cash. But where do you get that money? From the first time you asked your parents for a candy bar at the store to the time they helped you buy your first used car, the Bank of Mom & Dad has been there.

When borrowing from parents makes sense

The Bank of Mom & Dad can be a great resource when you’re first starting out in the “real world.” When you’re in college or starting your first job, you may not have had time to build up an emergency fund or save for financial opportunities.

Often, parents don’t charge interest when they give you a loan, and the repayment terms are manageable. Even when they do charge interest, your parents are unlikely to act as loan sharks. You can usually get a better deal from your parents than from a bank.

Here are some times you might turn to your parents for a loan:

• Education or training. Turning to your parents to help pay as you acquire marketable skills can help you get ahead later. Even if your parents can’t pay the entire tuition bill, they might be able to help with housing and other costs, reducing your need for federal and private student loans.
• Employment gap. If you’re looking for your first job after school or you’re between jobs, a loan from the Bank of Mom & Dad can keep you afloat.
• Buying a home. Borrow money for a down payment on a home if you could use a bit more to do the deal. When the money comes from your parents, the lender is more likely to see it as a gift—and let you use the money.
• Security deposit and moving costs. When you’re moving to take a new job, borrowing from your parents for the cash to cover the security deposit at your new rental or to help pay the movers can be a big deal.

Dos and don’ts of loaning to relatives

Whether you’re borrowing from parents or lending money to your own kids or siblings, loaning to relatives can be a tricky proposition. As you approach this thorny issue, consider ways to make it less personal and more of a business arrangement.

When lending to relatives:

• DO create a promissory note. It may seem formal and excessive, but a promissory note spells out the terms of a loan. When you both have a signed copy of the agreement, you won’t have to rely on memory to determine payments, the length of the term, and other details.
• DO consider charging interest. Even if it’s a relatively low rate, like 1% or 2%, charging interest further formalizes the loan. Additionally, you don’t have to worry about gift tax limitations for large amounts.
• DO include death provisions. Spell out whether the death of one of the people involved—borrower or lender—results in forgiveness of the loan or continued payment.
• DO consider making a gift of smaller amounts. In some cases, a gift might be more appropriate. That way, there are no strained feelings. The recipient can potentially repay the giver later (whether financially or “in-kind”) when they’re in better circumstances.

Avoid these missteps when lending money to relatives:

• DON’T use guilt as leverage. Helping family members shouldn’t result in a guilt trip. Whether you’re borrowing from parents or lending to someone else, guilt shouldn’t be part of the equation. Even if you need to renegotiate the terms, try to do so in a professional manner, without shame around money.
• DON’T lend more than you can afford to lose. If you’re lending, don’t part with more money than you can afford. While that money is lent out, you can’t use it for your own needs. If you’re borrowing, don’t demand more than is comfortable for your parents or relatives.
• DON’T cosign a loan. Avoid using someone else’s credit or staking your own good financial reputation. You might think this is an alternative to loaning cash to someone, but if they don’t follow through, it’s your credit on the line—and you could be on the hook for the debt if they don’t pay.