Lending money to friends or family – should you do it?

All / 30.08.2018

Lending money to friends or family – should you do it?

What would you do if a family member asked to borrow money – besides the less painful option of beating yourself over the head with a fence paling? You want to help, but you’re right to be wary.

It’s a difficult subject that despite everyone’s best intentions, often ends in tears.

 

You’ve worked hard, saved for retirement, paid off your home and raised your kids. You’re sitting on a nice little nest egg and expect life to be cushy. Here it comes:

  • your teenager wants to buy a car,
  • your kidult needs help getting into a first home,
  • a sibling has a brilliant start-up business idea,
  • your between-jobs best friend is struggling to make mortgage repayments.

Let’s say you agree, now what? Can you be certain you’ll see your money again? How do you preserve the relationship? Where will the money come from: Savings? Superannuation?

Stop right there!

You really should speak with your financial adviser, after all, whether you’re retired or still working, your financial strategy may be disrupted.

If you’re working, taking money from savings may adversely affect your investments or other plans, such as your annual holiday. If you’re retired, withdrawals from super or pension accounts may impact your income stream and how long your income will last.

After speaking with your adviser, if you decide to go ahead with the loan, it’s recommended that you draft a legal agreement. It should cover the following:

  • the loan amount,
  • by when it should be fully repaid,
  • how/when repayments will be made – instalments, lump sum, etc.,
  • whether interest is charged and, if so, how much,
  • what happens if the borrower’s situation changes through unemployment, divorce/separation, etc.
  • action taken if terms are not met.

Both lender and borrower agree to the terms, and once it has been checked by a legal professional, each party signs.

Other options

If you are reluctant to lend the money but still want to help, there are some alternatives but they also have their pitfalls.

Co-borrowing means the money is borrowed from a financial institution and both of you sign. If either party fails to meet their share of the loan, the other is responsible for repaying the full amount.

Guarantor allows your friend/family member to borrow the money themselves. You sign as guarantor meaning you are legally responsible for repaying the entire loan if payments are not made.
Gifting means you give the money to the borrower. If you’re receiving Centrelink benefits, gift amounts are limited and benefits may be affected. You must seek advice from your adviser and/or Centrelink.

These options may also impact your credit rating and your future borrowing eligibility. Additionally, if you forgive a loan, Centrelink may treat it as a gift and assess you accordingly.

It might seem distasteful, but you must consider your own position carefully. Seek professional advice and take steps to protect yourself.

Remember: “reality” television courtroom shows wouldn’t exist if people didn’t borrow money from one another!

For more information or to speak to one of our Financial Advisers – please contact TNR Wealth Management on 02 6621 8544.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances