Borrowing money is part of our financial reality and in this country we all need to have a good credit history. Even employers check applicants credit scores nowadays.
Lending your children money can be a good way to help them understand terms such as principal and interest and how much extra money one pays when choosing to borrow instead of saving to buy something.
When you borrow, you pay more. If your child wants a game or a toy or clothing and she hasn't saved enough it could be an opportunity for a lesson about how credit works.
You can loan them the amount she needs plus charge a 10 percent interest over the term of the loan. For example, if she borrows $100 explain that she will have to pay you back $110. Divide this amount into a fixed number of installments that you both agree to.
__You need to pay on tim__e. Make sure that you both agree on a fixed date for the monthly payment and make sure you both stick to this date.
Before lending the money, you should also explain to your child that missing a payment is called a default and it will increase the loan's interest by 5 percent. Instead of $110 they will owe you $115 and so on.
Sign an agreement. Once you both agree on the terms, make a "loan document" that you both sign.
If you give her an allowance, deduct the installment payments until the loan is paid in full. Make sure that you follow the agreement that you both signed. Hopefully your child will pay the debt on time and realize that borrowing money has a cost.
Yamila Constantinos is a pioneer of financial education for Latinos. She is a member of the National Financial Educators Council Advisory Board and a winner of the US Hispanic Chamber of Commerce At the Table award for women entrepreneurs.
Image via iStock
