Many older adults who are financially established give financial help to relatives. For example, they may help by cosigning a loan, educating younger relatives concerning money matters, or saving for a grandchild’s college expenses. Wanting to help relatives can be a generous choice; however, even in familial relationships, it is important to understand the terms of the help you are giving. It is also important to be on the lookout for scams, which may involve bad actors masquerading as family or claiming to represent family, any of which target older adults.
Understand the risk of cosigning a loan
If you are thinking of helping a loved one borrow money by being a cosigner for their first car loan, to obtain a credit card, or to get a student loan, there are important things to know first. When you cosign a loan or sign up as a “guarantor,” you are agreeing to become legally liable for their loan and pay the debt obligation as one of the borrowers. In this situation, if your loved one fails to make payments in accordance with the terms of the agreement, you are liable not just for the amount of the debt you cosigned, but also any interest accrued, late fees, and collections costs. Even though cosigning is a well-intended gesture, a defaulted loan could be difficult to repay, especially if you are on a fixed income. It can also be costly and stressful, possibly damaging your own credit history and subjecting you to dealing with debt collectors. If your credit history is impacted by the primary borrower’s failure to make timely loan payments, it could be harder for you to obtain credit in the future, or you may be charged a higher interest rate when you borrow with poor credit history.
Creditors may provide a disclosure notice, which explains the nature of a cosigner’s obligations and liabilities under the contract. It is very important that you fully read this disclosure notice, the terms of the agreement, and the payment responsibilities prior to becoming obligated in a consumer credit transaction. If the primary borrower fails to repay the loan, you as the co-signer are responsible to pay the debt. For more information about the risks you take when you become a cosigner and ways to reduce those risks, visit the Federal Trade Commission (FTC).
Talk with younger relatives about managing money and using bank services responsibly
An effective way to help develop sound money-management skills is for family members to regularly talk with younger relatives about basic financial concepts starting at an early age. Teaching self-control, the ability to delay gratification, and basic math skills early on can provide a foundation to support financial well-being in adulthood. Establishing an early and positive relationship with a financial institution, and teaching concepts such as the benefits of saving money for a sizable purchase (such as a bicycle or car) and how to wisely manage credit, will provide a strong foundation for financial success. In addition, Money Smart News for Kids has good lessons for teaching.
Explore ways to save money for a child
If you want to help pay for a younger relative’s education expenses, such as tuition for college, you may want to open a tax-advantaged 529 Plan or Coverdell Education Savings Account (Coverdell ESA). As long as all funds are used for qualified educational expenses, the money earned will not be taxed. For more information about these options, visit the U.S. Securities & Exchange Commission at 529 plans and the Internal Revenue Service at Coverdell Education Savings Accounts.
Be on guard against phone calls from con artists
A common scam targeting older adults involves an imposter calling an older adult pretending to be a relative in trouble. The caller (sometimes impersonating a relative) does enough homework to mention the name of the relative or other people the older adult knows and may claim his or her wallet was stolen, or even that they are in jail. They may sound like they are crying, which makes it difficult to recognize the voice. The scammer may even spoof phone numbers, which means that they can make it appear the call is coming from a relative. The fake relative usually pleads for the older adult to send the money immediately and not tell any family members for fear of upsetting them.
In another scam variation, the caller or imposter may claim to be a lawyer, police officer, or someone else trying to “help” the relative and ask for money or credit card information.
Many older adults immediately jump to the assistance of a relative without asking questions that would verify the caller’s identity. If you find yourself in this situation, always check with another family member to determine whether your relative actually is in trouble and needs money. Consider trying to reach the family member you believe is in trouble the way you normally would, such as using their cell phone or via social media. If you decide to send money, only send money to people you know. Never wire money or send gift cards or money through payment apps to strangers who claim they are helping your family.
Watch out for check washing scams
If you write checks, it is important to regularly review your bank account history or statements to verify that your account was charged the correct amount for each check. Make sure that the name you put on the front of the check to receive the funds (the “payee”) has not been changed. While it has always been a best practice to review your checking account statement for errors or fraud, it has become even more vital due to the increase in check washing scams. A check washing scam is when a scammer changes the payee name(s) and usually the dollar amount on the check, and then deposits the check for the scammer’s benefit. These checks are stolen from mailboxes, including personal mailboxes by residents’ doors and from blue U.S. Postal Service mailboxes, then washed in chemicals to remove the ink. Scammers will even use copiers or scanners to print fake copies of a check. A check that was cashed, but never made it to the intended recipient, may have been check washed.
If you detect your checking account was charged incorrectly, including checks paid to the wrong payee, contact your financial institution immediately. There are legal protections available to account owners, although there are variations among different state laws. Timely notice is generally required to get the full benefit of the applicable law. For more information on check washing, visit the United Postal Inspection Service at Check Washing.
Whether you are helping a relative in need or providing assistance, be sure to understand the terms of the help you are giving, and be on the lookout for scams intended to steal your gift.