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 hammer? You want to help, but you’re right to be wary. Remember: “reality” television courtroom shows wouldn’t exist if people didn’t borrow money from one another! So, is lending money to those closest to you really a good idea?
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 seek professional advice before you do anything, 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 receiving financial advice, 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.
If you are reluctant to lend the money but still want to help, there are some alternatives but they may 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.
Before handing over your hard-earned money or even agreeing to one of the other options available, contacting a finance broker may be a better choice. They have access to dozens of different products and may have a solution that doesn’t involve you at all.
It might seem distasteful, but you must consider your own position carefully. Seek professional advice and take steps to protect yourself.