Managing The "Family Bank"

If you are well off, there may be more than one relative hoping for a loan from you. Some families deal with multiple requests for money by adopting a "family bank" approach. The family bank is an approach in which you make loans available to all without preference, on condition that borrowers agree to certain preset standards.

Family banks and similar concepts are not new ideas; they've been in use for many generations in some wealthy families. The family bank was particularly common before institutional lending and credit cards became prevalent. The point is to leverage the family's financial resources in a win-win transaction between family members-for example, adult children gain the use of the parents' money, and the interest payments stay within the family. Plus, the children gain a valuable money management experience in a private and flexible setting.

The family bank can be a great source of help, but also a great source of friction if not properly managed. To make family banks work for multiple loans within the same family, take the following steps:

• Treat each loan request with the same respect and analysis, by focusing on its financial merits.
• Keep everything in writing, as if you and your borrower are strangers. Relying on each other to remember the exact terms of a loan is a recipe for trouble.
• Establish standards that all loans adhere to, such as a minimum interest rate, a maximum loan amount, and required documentation.
• Keep each borrower's loan terms and status private. If the borrowers want to share information, that's up to them.
• Create an incentive system for good financial habits. allow benefits to accrue to borrowers in good standing, such as lower interest rates and better repayment terms. Then, communicate those benefits to everyone involved.
• Communicate to everyone the events that would trigger the "bank" to stop making loans in general, or to one person in particular.
• Consult with a family accountant or attorney on a regular basis to handle the tax implications of the family bank in general, and of each loan in particular.
• Use a loan servicing company like Virgin Money, or other 3rd party professional to administer loans.