Lending money to family often seems like a good idea at the time. Helping out someone you have a close connection with can enable them to succeed where they might otherwise struggle, strengthen familial bonds and create good feeling. However, it’s important to ensure that you’re lending to family in the right circumstances and for the right reasons. Otherwise, you may find that you end up out of pocket and with some very strained family ties.
How can you make sure that lending money to family won’t jeopardise your relationships? These tips are designed to help you ensure that the process is fair on everyone.
- Stick to cash. If a family member wants to borrow cash from you this is a simple transaction where there aren’t likely to be any misunderstandings. It all becomes much more complicated if you’re doing something else, such as backing their business or you’ve been asked to open a credit card in your name that they can use. If you want to keep things simple then it’s far better to stick to cash.
- Don’t put yourself in an unaffordable position. The worst case scenario with family lending is that whoever you lend money to is not ever able to pay you back. If that does happen where would it leave your finances? Be honest about how close to the edge you are with cash yourself and, if lending money to someone in your family would leave you feeling anxious about your financial future, don’t do it.
- Act like a bank. A professional lender would never offer money to a borrower without doing some due diligence into their financial situation first. If you’re going to be lending money to family you have every right to ask questions, such as why they need the cash and how they are planning to pay it back. Especially for larger amounts you’ll need to see where the income is going to come from to make repayments on any loan that you give them. You might also want to ask to see evidence of their other outgoings – if their income won’t cover these as well as the repayment of your loan then it’s not a great situation in which to advance anyone any cash.
- Set some terms for the loan. Family lending can feel very informal but you want to avoid a situation in which the arrangement is so casual that it’s not honoured. So, it makes sense to sit down and discuss the terms with whoever you’re lending the money to. Terms will include how long the loan is for, when the repayments will start and how much each of the repayments will be. Are you going to ask that repayments are made in cash or by bank transfer? Charging interest is another option – although you want to ensure that you’re not being unfair to your family member you’re entitled to charge a percentage for what you’re able to loan.
- Make sure you put everything in writing. Just in case anyone forgets at any point in the future, it’s always worth ensuring that you have written down what has been agreed. This can prevent a lot of arguments arising over how much was borrowed or what the arrangement was in terms of when it was supposed to be repaid. Write out all the terms of the loan and then ensure that both parties sign the same document so that you have a written record of the agreement and the fact that both of you wanted to go ahead with it.
Lending money to family to buy a house
Given the state of the property market today – high average prices compared to low average incomes – many people need help getting over the line when it comes to buying. If you’re considering lending money to family to buy a house you’re not alone. The Bank of Mum and Dad is frequently called upon to help people make purchases today, as well as the support of other relatives. However, remember that there are other options if this isn’t affordable for you. For example, if you have a family member who has a 5% deposit the Help to Buy scheme could help make up the difference between this amount and what would be acceptable to a lender without the need for you to get involved. There are also many options when it comes to lending money to family in this way, including structuring the payment as a loan with interest or drawing up a deed of trust, which means that you’ll get back whatever you put into the property if it’s sold in the future.
If you feel you can trust your family member with paying back the payment but don’t have the funds to support the loan, another option is to become a guarantor for a guarantor loan. If your family member has serious financial debt issues, there are a number of organisations that can help such as Citizens Advice and the National Debtline.
Whether lending to family is a good idea depends on your individual situation, as well as that of the person you’re considering lending too. It’s always a good idea to gather lots of information before coming to a conclusion and make sure that the borrower has exhausted all their other better options first.