Youâ€™ve worked hard, saved for retirement, paid off your home and raised your kids. Youâ€™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 grown-ups need help getting into a first home,
- a sibling has a brilliant start-up business idea,
- your best friend whom is between jobs is struggling to make mortgage repayments.
Letâ€™s say you agree, now what? Can you be sure youâ€™ll see your money again? How do you preserve the relationship? Where will the money come from: Savings? Superannuation?
Proceed with caution
Whether youâ€™re retired or still working, your financial strategy may be disrupted.
If youâ€™re working, taking money from savings may adversely affect your investments or other plans, such as your annual holiday. If youâ€™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, itâ€™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 borrowerâ€™s situation changes through unemployment, divorce/separation, etc.
- action taken if terms are not met.
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.
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.
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.
means you give the money to the borrower. If youâ€™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 wouldnâ€™t exist if people didnâ€™t borrow money from one another!
ASICâ€™s MoneySmart website www.moneysmart.gov.au
â€œLoans involving family and friendsâ€
Australian Government Human Services website www.humanservices.gov.au