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:
Let’s say you agree, now what? Can you be sure you’ll see your money again? How do you preserve the relationship? Where will the money come from: Savings? Superannuation?
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 an adviser, if you decide to go ahead with the loan, it’s recommended that you draft a legal agreement. It should cover the following:
Both the 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 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 by calling us on 1300 707 955 so that our financial planning team can ensure that your financial strategy will not be adversely affected if you do choose to lend to your family/friends.
Remember: television courtroom shows like Judge Judy wouldn’t exist if people didn’t borrow money from one another!
ASIC’s MoneySmart website www.moneysmart.gov.au “Loans involving family and friends”
Australian Government Human Services website www.humanservices.gov.au “Gifting”