Lending to a friend? Look out

The one-time, worthy need

Perhaps you know someone who's struggling to pay her college tuition or who needs a few thousand more dollars to buy his first home. You'd like to help out, even without being asked.

Whether you can even think about helping depends on whether your own worthy causes -- such as your retirement -- are being taken care of adequately. Experts underscore that giving money in any circumstance requires that you have funds to spare.

"Ask yourself first if you can truly afford it," Schomburg says.

If discretionary funds are there, you can choose to give, just as you might choose to spend on a vacation or other indulgence. Consider your munificence a gift, even if you indicate that you'd like to be paid back.

"If you say it's a loan and you get paid back, great. But you'll damage your relationship if you expect the money back," says Dara Duguay, the director of Citigroup's Office of Financial Education.

The lifestyle boost

Your college-age son wants an apartment near campus and says he'll pay most of his own food costs and some of the rent. Or maybe your 26-year-old daughter wants to take an out-of-town job but won't have a roommate, so her new salary won't cover single living.

Young adults may not have a clue how much to budget for the electric bill or even weekly groceries, because they've never footed such bills, says Duguay, who is also the author of "Please Send Money: A Financial Survival Guide for Young Adults on Their Own."

Instead of handing out money as it's needed, it's better to set up a budget together at the outset. Agree that you'll pay certain expenses and try to stick with that, Duguay advises.

"Don't give them too much of a lifestyle boost," Duguay adds. "It takes away their incentive to get a better job or learn how to comparison shop."

Look into Web sites such as Buxfer or Mint.com, which allow you to track shared expenses for free. Such sites are a great idea, Duguay says, because a display of expenses helps young adults budget more effectively. It also formalizes exactly what parents will and will not contribute.

If you're not in a position to lend money but would like to help out by co-signing a loan, think twice about it. Both parties are responsible for a co-signed loan. If the person you were trying to help stops paying the debt, you are responsible for it. You now have to repay the loan or ruin your credit rating. Bankrate's archives are filled with stories about consumers who were burned by co-signed loans.

This story was reported and written by Marilyn Kennedy Meliafor Bankrate.com.

Published Sept. 12, 2008

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