Six do’s and don’ts of lending money

22 Jul 2016

Mixing friends and family with money can be tricky at times, even if you want to give someone a hand. Here are our tips on how to lend money so you can help someone out – and keep the peace at the same time.

According to Bessie Hassan, money expert at finder.com.au, even small amounts of unpaid money can be enough to end a relationship. Retirees are also often at a higher risk if a loan is not paid off, as they no longer receive a steady income.

“Retirees also have less time to recover from a financial setback which means they need to be cautious about how they use their money,” Bessie advises. “Consider whether you can actually afford to lend the money in the first place and if you’re in doubt, then speak to an accountant or financial planner for advice.”

“Some retirees may feel that helping out their family is worthwhile as it’s likely that their funds will be inherited by their family at some point down the line, but retirees should have the mindset of using their savings to improve their quality of life, and only help out family when a formal agreement has been put in place.”

Do lay down the ground rules

According to Bessie, the biggest mistake people make when lending money to loved ones is not making it formal and discussing how it will work.

Talk about the terms of the loan agreement, how regularly the repayments will be made and if they’ll be made via cash or a bank deposit. Don’t be afraid to discuss what happens if the other person defaults on the loan, either.

“Finances are one area where you should never let your guard down,” says Bessie.

Do consider their financial behaviour

Firstly, it’s important that you ask your family member or friend to be honest with their financial standing. If you’re familiar with their money situation, consider their behaviour and whether you think it’s likely they will repay your loan.

“Do they have job security? Do they often pay their credit card bills on time? Have they ever defaulted on a loan repayment? Have they ever been rejected for a loan application? Thinking about their financial behaviour will help you decide whether or not they will be able to repay the loan,” advises Bessie.

Do notify Centrelink

“If you’re receiving benefits from Centrelink such as the Age Pension, then they’ll need to know of any loans you make,” says financial adviser Wally David. “Put simply, the loan is still considered an asset, even though it involves family.”

Don’t be afraid to say no

If you have a sneaking suspicion that someone might not be able to stick to an agreement and repay the loan, you’re well within your rights to say no.

“If they’ve had a bad history when it comes to credit, chances are it’s not going to improve with a parent or family member providing the loan. Explain that money is often the biggest cause of family disputes and that you don’t want that to occur in your relationship,” suggests Wally.

Don’t go into debt

If you’re struggling to make ends meet, don’t lend money to anyone, even if you really want to help out. Should your loved one not be able to repay you, you’ll put your own finances in jeopardy, says Wally.

Don’t stick your head in the sand

“If payments are being missed, act quickly by reminding them of the agreement you drew up at the beginning and confront any difficulties head on before they spiral out of control,” says Bessie.