Never A Borrower Or Lender, Be ( especially if you are a child!)

An issue facing kids is borrowing and lending. Just as some societies distinguish themselves from the rest of the world by setting up elaborate barter systems, an important element of preteen and teenage custom is borrowing and lending money. You’re not going to change that. But you can discuss it and channel it before it becomes a problem.

One step toward helping your children understand borrowing and lending is to incorporate loans into the Allowance Jar System you’re using. Occasionally, your child will want to buy something that’s “on sale” right now or that it may be a “limited-time opportunity,” like spending when on vacation. The purchase price may not be out of range of their budget – they could easily afford it with four weeks of Medium-Term Savings – but they don’t have the ready cash right now.

But if you loan them the money to buy it, are you caving in and abandoning your system? Certainly not. You can work out a repayment schedule, with just a small rate of interest. After all, you’re not trying to make money off your kids. The interest payment can go into a family vacation fund, for instance. The point is that you want your kids to understand how borrowing and lending work. Charge them a flat interest of 10 cents per week on every dollar borrowed. They will start to feel the bite of interest, and that’s the point.

You can also use borrowing and lending situations to teach your children about establishing credit. If your child repays the loan on time they’ll be eligible for another, perhaps larger loan later. If not…they become a credit risk and won’t be eligible for another loan until they’ve proven their responsibility to your satisfaction.

When it comes to putting these lessons into practice outside the family, one rule changes right away. If your kids are loaning money to a friend, they shouldn’t charge interest. It’s a bad precedent to set between teenage friends. The most important thing to teach your child is that money lending is an exchange that has rules. If they’re going to lend money to a friend there should be a clearly defined repayment schedule. Your teen should discuss with the borrowing friend:  (1) How much money they want to borrow; (2) What the money is for; and (3) When the loan will be repaid.

More importantly, your young lender should know that this transaction is about “money” not “friendship.” The friend may not repay the loan on schedule, for instance. Explain that someone can be your good friend, yet still be irresponsible with money. With a contract (even a verbal contract), clearly understood by both parties, if a borrower fails to keep up their end of the deal, it doesn’t have to spell the end of a friendship. Your teenage lender should make it clear to their friend that there surely won’t be anymore loans available to them. However, another important lesson every lender should know in advance is that they should never lend more than they can afford to lose. Tough lessons, but real life!