July 18, 2012 admin

Should you lend money to friends and family?

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“Be careful about lending money to friends or family, it may damage their memory!”

Ask yourself the question first – why do they need the money?

Money troubles are a sign of ongoing issues and habits. You don’t want to be an enabler. If the borrower is engaged in a destructive lifestyle and habitually in financial hot water you don’t want to be involved in this. You can be emotionally supportive but you do not want to be financially supportive.

If you decide that you want to help, there are a few things you have to ask yourself-

  1. What are the financial consequences to you if they cannot pay the money back? Can you afford to take the risk? Don’t loan more money than you are prepared to lose. There are no guarantees of what tomorrow brings, you need to be able to live with not having the debt paid back.
  2. DO NOT dip into your retirement funds. You never ever lend your retirement money, ever!
  3. Have you involved your partner/spouse in your decision? Communication with them may not only save you money but save your relationship. If your spouse or partner does not agree with lending the money DON’T DO IT!
  4. Evaluate the risk. If you lend to one adult child you are setting a precedent. Are you prepared to deal with the potential strife caused? Are you prepared to lend to all adult children?
  5. What happens to the loan if you die? Does it just disappear? If you have leant money to an adult child, it would be a good idea to write the loan into your will and reduce their share of the estate by that portion or ensure that in terms of your will they are to still pay that loan back to your beneficiary or your estate. One has to ensure this is carefully worded so as to prevent capital gains tax from being owed in your estate on your death.
  6. What happens if they die? Ensure that they have a life assurance policy in place and that you are the beneficiary for the amount that is owing to you.
  7. Is this a loan or a donation and how will the tax man view the loan? Is this going to affect your tax? You are only able to donate R100 000 tax free per year. If it is more than R100 000 this can be seen as donations tax and you will be liable to pay 20% donations tax for any money’s donated above R100 000.

If you are going to lend money you are now becoming a bank. A bank has rules and contracts on any money lending transaction. What type of contract are you going to draw up and more importantly what are you prepared to do if the person does not pay back the money?

The contract needs to be specific. It is a business agreement, you need to be clear,  you are lending your hard earned money to another human being. What is your protection?

  1. How much are you lending?
  2. How will the money be paid back?
  3. What are the dates and the schedule of repayment?
  4. What happens if the debt is not paid back?
  5. What will you take in lieu of the payments?
  6. What are the interest rates?

Lending money to friends and family is not to be taken lightly, give careful thought to this financial decision and the financial implications to you and your family.

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Image: FreeDigitalPhotos.net

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