Q: My youngest son wants to borrow $5,000 to start his own business. My wife is afraid to tell him no. She thinks we should just give him money and not expect anything in return. I disagree. He doesn't have a very good track record with money, so I'm a little worried that my investment will be lost. Should I loan him money and hope for best or just tell him no and hope he doesn't get too upset?A: The first thing you need to do, Jeff, is determine if this money would be offered to your son in form of a gift, loan or investment. The very wording of your question tells me that you have not yet made that all-important distinction.
It sounds like your wife wants to make a gift of money, expecting nothing in return but undying love of her last born son.
You, on other hand, don't know if you should offer money as a loan (should I loan him money) or as an investment (worried that my investment will be lost).
Until you can make that distinction, your money should remain in bank.
I have a very simple rule when it comes to loaning money to relatives: NEVER, EVER loan money to anyone you might have to sit next to at Thanksgiving dinner.
"Son, pass me that dressing and tell everybody story of how you blew your old dad's retirement money..."
A loan from a relative is no different than a loan from a bank. You, Mr. Banker, are giving your son, Mr. Borrower, use of your money for a specific period of time and you fully expect loan to be paid back under specific terms, even if his business goes south. Sure, you will probably be a little more forgiving than a bank when loan goes unpaid, but damage to your personal relationship could be extreme and hard to repair.
In most basic of terms if you loan your son money you become creditor and he becomes debtor. Have you ever heard of a creditor and debtor having a very good relationship? Has Visa ever called you up just to ask how you're doing? Has your mortgage company ever named a kid after you? Probably not.