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Loan to loved ones

Loan to loved ones 

For many of us, when a loved one asks us for money, our first instinct is to help out. If you ever find yourself in this situation, here are five suggestions to make sure the process doesn’t end badly.

1. Think carefully

Ask yourself: what are the reasons they are asking for a loan, and what is their capacity to repay? If you were a bank, would you consider them a good financial risk? For instance, do they need a loan because they have mismanaged their money – ie. spending big, or worse, gambling big – and have fallen into debt? 

Perhaps they are trying to rebuild their life after a relationship breakdown, a job loss, health problems or business failure.

Or are they wanting a loan to explore a business idea or buy a financial asset such as an investment property or their first home?

Consider what impact the loan might have on both your financial situation and your relationship with that person if it is not repaid in the future, or even if it is repaid more slowly than you expect.

2. Check your emotions

When a loved one tugs on your heartstrings with a hard-luck story or the next sure thing, it can be difficult to refuse a loan request. Press pause before you give them the nod and consider the emotions that might be driving your decision to extend a loan. What role is fear, guilt, or obligation playing in your choice? Are you feeling pressured or coerced in any way? If you are feeling manipulated, it may be wise to refuse any loan requests.

3. Get it in writing

Approach the loan as you would any other financial arrangement. Before you hand over any money, the terms of the loan should be discussed and documented in a simple agreement.

Anne McGowan, chief executive, Protecting Seniors Wealth, says an agreement will make it clear whether the money is a gift or a loan. It should specify the interest payable and the term of the loan. “Many financial planners have told me if a family agreement had been put in place then elder financial abuse could be avoided,” she says.

It can help to involve a third party, such as your financial planner or accountant, to facilitate the conversation.

4. Set a limit

If your loved one is likely to ask for further loans, establish a clear boundary at the outset. Knowing your upper limit will make it easier to say no next time if necessary.

5. Read the fine print

If a friend, family member or love interest is asking you to guarantee a loan or become a co-borrower, it’s important to be well-informed about the implications for you. Here are some things to think about in that situation.

• You are a co-borrower if you sign a loan with someone. In most cases you will be jointly and individually liable for the loan. So if they fail to cover the repayments, the liability will fall on you.

• Similarly, a guarantor is liable for repaying the entire loan if your friend, family member or love interest is unable to or decides not to make the repayments. However, as guarantor, you don’t have the right to any property or items purchased with the loan.

• Would you have the savings to cover the loan, or would you have to sell an asset, if your loved one failed to make the repayments?

• Failure to make the repayments could impact your credit score and being a co-borrower or guarantor for a loan could impact your future borrowing capacity.

• Read any documents you sign and know the amount and the term of the loan, interest that will be charged, and the purpose of the loan.

“Approach the loan as you would any other financial arrangement. Before you hand over any money, the terms of the loan should be discussed and documented in a simple agreement.”