Lending money to family

Introduction

In later life you might be in the fortunate position of being able to lend money to family members in need. This might be in response to your adult children wanting to get into the property market or a way of helping out a sibling who is starting again after a separation. It might be a request from a grandchild wanting to buy their first car or a family member keen to expand their business.

Regardless of the reason you are making the loan, there are some things you should consider before you step in to help. This article will take you through the questions you should ask yourself before lending money to family members and some processes to follow to make sure it doesn’t end in tears – or worse.

Do you want to lend the money?

Do you want to lend the money to this person? In fact, do you want to lend money at all? Just because you have money to spare does not mean you’re obliged to lend it or give it away. It is your choice who you lend money to, if anyone, and on what terms.

Ask yourself whether you feel comfortable lending money to this person and whether you feel able to say no. If the answers to both are ‘yes’, then ask yourself:

• Do they understand it is a loan and not a gift?

• Do you mind what they spend the money on?

• Do you feel pressured to lend the money, or are you being threatened in any way if you try to refuse?

If you are feeling pressured, talk to a trusted friend or family member to let them know what’s going on. Or call the Elder Abuse Helpline if you would like professional support to stand up to someone who is pushing you to do things you don’t want to do.

How might the loan affect you?

• If you make a loan to someone, you could end up with a shortage of funds when you need it and have less borrowing power in the future. Think about your ability to pay upcoming bills, including unexpected health-related ones, and what impact the loan might have on you if you experience further cost-of-living increases.

• The family member you’re assisting may have every intention of paying back the loan in a timely manner, but things can go wrong. You need to consider the possibility that the money will not be returned completely or at all. What effect would that have on your future?

• Consider how the loan might affect your tax or inheritance plans. This might vary depending on what the loan is being used for (for example, if it is being used to generate further income). It is best to seek specialist financial advice about this.

• Your age pension entitlements and aged care costs can be affected by gifting money to family members or forgiving a loan owed to you. You should always tell Centrelink about any loans or gifts and ensure you have proper documentation of the loan terms (not just a verbal agreement of repayment).

Centrelink and the age pension

Find out more about how your income, assets and loans can affect your age pension.

How might the loan affect your relationships?

Money can be a contentious issue within families, and it is worth spending some time thinking about how a loan might affect your relationships with the recipient and with other family members.

• If you lend money to one of your children, how might others respond?

• Will the loan have any effect on your estate, your will or the amount of money you leave to different family members?

• How will your family member respond if you refuse to lend them the money or if you insist on repayments?

What happens if things go wrong?

Sometimes a family member may not be able to repay the loan because of an incident outside their control. These could range from a marriage break-up, unemployment or bankruptcy to a sudden illness or devastating accident, interest rate rises and inflation.

Before lending the money, think about what you might do in this situation.

• Will you need them to repay the loan, or will you be able to forgive it (which means, write it off)?

• What effect might the lack of repayments have on your own financial situation?

• What will you do if repayments put stress on the family member and their children?

Can I force the person to repay the loan?

You can take legal action to recover the loan if the person stops making repayments. This process must be started within 6 years (counted from the first date of repayment or, if there is no formal documentation, from the date the money was given).

It is important to know that the law regards money loaned by a parent to a child as an advancement. This means it will be presumed it was a gift unless you can prove otherwise, which may make it more difficult to enforce repayments.

For this reason, it is important to formally document the loan and keep your own copy of the loan agreement.

What should I do when lending money to a family member?

The old adage ‘hope for the best, plan for the worst’ is a good one to think about here. Making a loan to a family member can be a generous and much appreciated way of offering support. By putting in place some simple safeguards, you can increase the likelihood that the loan gets repaid and help manage any tensions or awkwardness before they turn into conflict.

1. Have transparent conversations

Be direct and frank when you are talking to your family member about the possibility of a loan. Make sure they understand that you expect it to be repaid and what repayment timeframes you are comfortable with. If possible, involve an independent person, such as a mutual family friend, so that the fact of the loan is undisputed and acknowledged.

2. Seek independent legal and financial advice

Make sure you understand the impact of the loan on your finances now and in the future – including if it does not get fully repaid. Check with a financial advisor whether the loan will affect your income, tax, assets or borrowing power, and make sure you understand and are comfortable with the terms of the loan.

3. Sign a formal loan agreement

Have a loan agreement drawn up and signed by all parties. This agreement should give details of the amount loaned, its intended use, the repayment timelines and whether interest rates apply. It may also include detail of what will happen if the family member defaults on the repayments.

An executed loan agreement is important should you ever need to take legal proceedings to recover the money or if you have to demonstrate to Centrelink, the Australian Tax Office or other family members that the loan is genuine and not a gift.

Disclaimer: The information provided on this website is not a substitute for individual financial and legal advice.