Bank of mom and dad could hurt your child’s economic growth

While helping a loved one reach their financial goals can be rewarding, lending money to children can put the lenders in a lose-lose situation. (AP Photo/David Zalubowski, File)

WASHINGTON – Tougher lending requirements in a recovering economy make for a tight money situation for many young adults. But add the trend of helicopter parenting, and experts say more parents are lending money to their children than ever before. reports 20 percent of parents in a recent survey say they have gifted, loaned or co-signed a loan with their children to allow them to buy a house. Two-thirds of parents polled in the survey say they’d like to do so in the future.

The survey, conducted by Better Homes and Gardens Real Estate, found baby boomers have driven the economy in the past 30 years and want to see that continue with the next generation.

“Our data shows that they are using what they’ve earned and what they’ve learned to invest in the future and help their children and grandchildren realize the American dream of homeownership,” Sherry Chris, president and CEO of Better Homes and Gardens Real Estate says in a news release.

While helping a loved one reach their financial goals can be rewarding, lending money to adult children can put the lenders, or parents, in a lose-lose situation Liz Davidson writes on Davidson is a financial educator and owner of a financial consulting business.

Parents who lend their children money typically fall into one of two categories, Davidson says:

  1. The bank of first resort

    Children of these families feel entitled and comfortable leaning on their parents rather than going down the often-challenging path of financial independence, Davidson says.

    “If mom and dad will give you a no-interest rate loan and won’t press you when you are late repaying the principal, then isn’t that a better, easier way to go than a financial institution which actually expects to be repaid, on time, with interest,” she writes.

  2. The bank of last resort
  3. This is when a child’s credit or ability to repay a loan is so unlikely that no other financial institution will back them.

    “If organizations in the business of evaluating credit risk turn your child down, then shouldn’t that be a cue to you that maybe the risk is too high for you as well,” Davidson writes. “This is particularly true if you are doing so, as most parents do, without interest – potentially compromising future goals like retirement.”

    Parents in this situation often end up having to ask their children for financial help in retirement because they dipped into their savings to help the child, she says.

Daily Finance reports the most common money bailouts are auto loans, with medical bills coming in second, followed by help with utilities, credit card payments, student loans and mortgages, according to a poll.

Daily Finance offers more tips for parents who are considering lending to their adult children.

There are even some companies that help families determine financial parameters and draft a formal agreement before starting a loan.

Davidson says there are certain situations when family loans do work:

  • The child has been financially independent before and can’t cover an unforseen cost like a health crisis
  • The parents are financially secure and the loan is small enough that it will not compromise their retirement
  • Both parties look at the loan as a business arrangement and agree to formal terms, including interest

WTOP’s Megan Cloherty contributed to this report. Follow WTOP on Twitter.

(Copyright 2012 by WTOP. All Rights Reserved.

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