Lending money to family members the right way
We’ve all heard horror stories of families torn apart by money, and while we’re obviously more than willing to help out a relative in need, it’s only natural to feel at least a touch of trepidation when you’re asked for a loan by a family member.
We’re going to take a look at the ins and outs of lending money to family members. By taking the appropriate steps you can protect your money, help a relative out of a financial bind and most importantly avoid conflict in your family.
1. Establish what type of loan it is
When you’re lending money to family communication is key. Conflict is often caused by misunderstandings which can be avoided entirely if you take the time to make sure all the important details regarding the loan have been nutted through.
From the outset you’re going to want to be aware of the following:
- The term of the loan.
- The amount of money being lent.
- Whether or not any interest will apply to the loan.
- What the frequency of repayments will be.
Be up-front from the beginning and make sure that the person is aware that it is in fact a loan and not a gift. While it may be a little bit awkward, it helps to get the terms down in writing. Even if it’s not a legally binding document, having the particulars on a piece of paper goes a long way to making sure everyone is on the same page.
2. Set clear boundaries
This is where it gets a bit tricky, especially due to the nature of lending money to family members. A 2009 Money magazine survey found that out of the readers who’d lent money to family and friends 43 per cent of readers only got paid back with part of the balance while 27 per cent never saw that money again. In the end of the day, while it’s great that you’re in a financial position to help a relative out, it’s important that you get your money back.
Make sure you set clear boundaries before you front the money up. If you feel uncomfortable lending more money or extending the due date for payments, it’s important they’re aware of this. Putting everything is on the table before the loan begins can help avoid things spiralling out of control once it’s too late to do anything about it.
3. Notify Centrelink
If you’re receiving Centrelink benefits such as the Age Pension, you will need to make them aware of any loan you make, even though it involves family. A loan to family is still considered an asset and Centrelink requires you to make this information available.
4. Include the loan in your tax return
If you’re receiving interest from your loan the tax office needs to know about it, even though it’s coming from a family member. As with other forms of income, this will be included in what’s considered your taxable income for the year.
Have you ever lent a family member money, or know someone who has? What was the experience like, and where there any safeguards in place?
Share you story in the comments.
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