As a parent it is natural to try to do everything you can to protect your children. If one told you that they were going to take out a £200 loan, then you may feel that, if you have the money, you would like to give them the loan rather than them taking out a payday loan for that amount of money. There are advantages and disadvantages of giving your child a £200 loan and it is good to think about both before you decide what to do.
Representative Example: £400 borrowed for 90 days. Total amount repayable is £561.92 in 3 monthly instalments of £187.31. Interest charged is £161.92, interest rate 161.9% (variable). Representative 305.9% APR. We are a broker not a lender. We don't charge fees. We don't sell your personal information.
It can feel really great to give your child a loan. Knowing that you can save the expense of a payday loan or any type of loan for that matter can be really good. You may decide to charge them some interest, perhaps not as much as the payday loan company would, but it could mean that you could make some profit from them as well. Alternatively you may decide not to charge them any interest and let them have the loan for free so that you are being really helpful to them.
With regards to repaying the loan you may decide to let them just pay you back when they are ready. This could really help them to manage the loan more easily. You may decide to let them pay back in small instalments over a long period to help them out or to pay a larger amount once they have saved up the money.
It may feel that giving your child a loan is a really kind thing to do and something which could potentially benefit you as a parent as well as your child. However, there are some disadvantages to doing this which need to be considered.
Once you lend money, then you may find that your child and possibly other relatives if they know about it could ask you for money. They may expect you to lend to them whenever they ask for money and even if it is for large amounts. You may get to a point when you can no longer afford to lend money or you want the money for yourself. If you refuse to lend it could cause a problem with your relationship with them. There may even be jealousy if it is a different family member that you refuse.
If your child still owes you money and you suddenly need some, you may be tempted to ask them for the money back. This could cause stress for them and they may not be in a position to be able to repay you. They may feel guilty or even anger towards you for asking for the money and it can cause things to be tense between you.
If you lend to your child at no interest or a low interest rate, then they will always think that there is a free or cheap loan available to them and therefore there is no need for them to be careful with their money. They might think that they can just spend whatever they want and not worry about earning enough to cover it because you will help them out. It can be better for them to learn the hard way, by taking a payday loan and having to deal with the stress of paying it back on time or else having extra costs and fees to pay. This could teach them that borrowing money is not an easy option and that they should be really careful with their spending and earning to avoid getting into debt again.
So lending to your child may not be such an easy decision as you think. It is worth thinking harda bout whether you think it will be a wise thing to do. If you do decide to do it then consider charging a bit of interest and setting up a repayment plan for them so it is more like a proper loan and they begin to understand how loans work. Also try to give them some financial help so they are more frugal and budget better and therefore do not get into financial trouble in the future.