Perhaps the only thing more difficult than watching your children struggle financially is having them ask you for money. Saying "I'd rather not" can be hard, no matter how able you are to help. But handing over your hard-earned cash — at the risk of never seeing it again — is equally difficult.
The reason that your children are probably coming to you for money is they already have tried borrowing through more traditional processes but have been turned down. The reason they have been turned down is a bank doesn't think they are a good risk. If that's true, then why are you lending them the money?
Helping your children with a loan changes the attitudes of all involved. Your kids look at you as the bank and may even resent paying you back, as if they are entitled to the money. You now look at your children and how they spend money more closely now. You may notice and be critical of the way they run their financial life. Attitudes and perspectives change when money is an issue within the family, so make sure all parties are prepared for this extra family stress.
If you do decide to lend money to your children, it is better to slow things down and have both parties put in writing the specifics of loan. First ask what the loan is for. Many parents just hand over the money and trust everything will be fine. You have the right to know how your money is going to be used and how it will be paid back. Judge for yourself if the loan is for a legitimate purpose. Be careful — you could be enabling your children to borrow money for foolish purposes.
Be sure that loaning your money out doesn't hurt your own retirement plans. Lending too much or not being paid back can mess up your retirement savings. If your child loses his or her job or becomes too ill to work, your payback period could be extended indefinitely. The worst case scenario is that you may never get paid back, which is something you should consider.
Be careful the precedent you are setting. Perhaps you are comfortable loaning money to an adult child who has always been responsible and worked hard, but not to his or her sibling who spends frivolously. Saying yes to one family member and no to another can cause major family rifts.
Money can drive a wedge between even the closest family members and friends. If you just don’t have the money, or are uncomfortable doing so, give yourself permission to say no.