How the Rich Lend Money to Their Families
Remember the days when -- if you were rich -- you were able to mooch off your wealthy parents easily and without consequence?
If your family’s loaded, we hope you enjoyed those times while they lasted, because if your family is like any of the ones the New York Times spoke with, they are no longer going to freely lend money to their broke munchkins.
According to the New York Times, “family banks” are starting to be all the rage with the rich who want to find ways to lend their children money -- oftentimes hefty sums -- without getting burned in the process. A family bank is when a “small group of advisers... sees formal lending in a family as a way to invest in ideas from younger generations, provide financing when real banks may be hesitant and teach lessons about stewardship and responsibility.”
People who wanted to borrow money from their families would have to go through a loan application process just like they would need to if they were to borrow from an actual bank. If they were borrowing money to start a small business, for example, their families might require them to submit a business proposal and to give them status updates on their business.
We get it. Lending family money has never been straightforward: it can be potentially awkward for one party if they’re unable to lend any money, it puts another in a bind if the borrower is unable to pay the loaner back. These are the same kinds of hassles shared by those who have to lend a close friend money, but it’s harder to cut family off than it is to cut a friend off if the deal were to go very sour.
But with the economy going the way it is, more children of wealthy families need help financially after college or when trying to get a business off the ground, and the rules of family lending are changing a bit.
Advocates of the family bank system say that it’s a more democratic way of doling out money and increases the borrower’s sense of liability to use the money wisely and devise a repayment system in place.
Financial advisers are saying that by making lending an actual financial transaction, officiated by a bank and abiding by all legal rules, parents are taking the chance to educate their children, “Whereas a hard bank would manage the loans for profit... a soft bank would look at the loans as a way to develop the human capital of their children.”
It’s never too late to learn about money, but it does seem a wee bit impersonal to have to fill out a loan application when borrowing from a family member. Yes, your family will probably be more lenient with you if you were to experiencing some hiccups with repayment, but getting your family loan approved by a “small group of advisors”? Filling out a loan application? Definitely sounds more “bank” than “family.”
If you were to borrow money from a family member, or if you needed to lend money to a relative, would you ever set up a family bank?