Should You Loan Money To Your Partner?

Ted Jenkin
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Here’s a very real scenario for you.  This couple is sharing a familiar story that I hear all the time:

So…our relationship is solid.  We are both thirty-one-years old. I’m not ready to propose, and there are certainly some kinks.  But she has asked if I would consider loaning her some money, so she can pay off some of her credit-card debt.

It’s amazing how much money and love are so inextricably tied together, but they are, so think through this one carefully.

The details: She has over $8,000 in credit-card debt and about seven times that in student-loan debt.  She earns about $55,000 a year.  Much of the debt was amassed as she finished graduate school and struggled, for a year, to find full-time employment.  She has been employed for a few months now and expects her income to increase over the next couple of years. 

I have zero debt and make approximately $60,000 annually. Additionally, I have about the same as my net wealth, about one-third of which is liquid.  We also live in Boston, which is expensive. I have been desperately trying to save money to purchase a home in a few years.  She would like to as well, but her debt is overwhelming her. She has asked for approximately $5,000 to pay off her credit card with the highest interest. She is only able to pay the minimum payment and that is less than the interest charges each month.
I have a few concerns about the loan:

1. Is there a way to protect myself and be able to recover my money in case something goes wrong and she can’t repay the loan? She has agreed to sign a promissory note.

2. Overall, I really want to help her, but it just seems like it could backfire.

3. Should I loan her the money?

4. Is it wrong to charge interest?   

These are important questions.  Here are my thoughts and comments:

1. I’m not saying your relationship is doomed, but combining money (even in the form of a loan) before the death-do-us-part can be extremely tricky, and often times has negative outcomes.  The only way to protect yourself legally is to seek the advice of a licensed attorney in your state.  This probably won’t feel very romantic to either one of you.  However, you don’t want to end up losing your hard-earned money if something goes wrong between you. If you decide it doesn’t matter if she pays you back in the long run, then make it a gift and leave it at that.   

2. Charging interest is a very personal decision.  Of course, there isn’t a commercial lender out there that doesn’t charge interest. However, they are in the business of loaning money to make money.   A “friendly” loan, like this one, still requires strong consideration of all the circumstances.  You must think about all of the terms you require carefully, including the loan period. Understand that if you decide to charge interest, it may not be well received, but she has a choice in the matter too, and can decide whether or not she will accept the terms you put forth.

Ted Jenkin (@tedjenkin) is the CEO of oXYGen Financial, a financial advisory firm managing more than six hundred million dollars.  He is focused on being your financial advisor and your financial therapist. He is a frequent guest writer for the Wall Street Journal and personal finance expert for CNN’s “Headline News Weekend Express” and The Weather Channel.

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