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Should you lend money to family?

What you should consider before handing over your hard earned savings

 

 

You’re probably fairly used to helping your family out with a little extra cash here and there. Whether it’s pocket money for doing chores, or money to pay phone bills, go see a movie or buy clothes, for example. 

But what happens when they put their hands out for help to buy the big ticket items? They might want some money to buy a car, pay for a holiday or even get a deposit together to buy their first home. 

The question is, even if you can afford to help your family financially, should you? It could provide them with a helping hand that’ll really make a difference, but you also must ensure your needs are looked after and you’re not leaving yourself short. 

Here are some things to think about:

  • Discuss how the money is going to be used. Is it something they could save up for or do they genuinely need your help? 
  • Decide if you want the money back. Even if you can afford it now, think about whether you might need the money for other expenses or commitments later. 
  • Agree on the terms of when and how the money will be repaid. If you decide on a loan, discuss how and when the loan could be repaid by, plus whether you will impose any sort of penalty (such as interest), if it’s not repaid on time. 
  • Write it down. This might sound overly formal, but it sets the ground rules for making a true commitment to repay the loan. 
  • Talk early and often to identify potential issues as they come up. Don’t wait until minor issues, such as late payments, become more serious. 
  • Give them a refresher on managing money. This is a good way to really embed the principles of needs versus wants. Ask your family to work out how much they could put aside by using the AMP savings calculator or budget calculator. 
  • Ask for advice. If you’re lending a significant amount of money, you might want to check with your solicitor if there could be legal repercussions, including what happens to the loan if your child gets married or is in a de facto relationship.

Providing financial support in other ways

Gifting

It’s a great, tax-free way of helping your family when they need financial help. 

Just make sure you think carefully about whether your gift will put a dent in your retirement savings and if you’ll have enough for the lifestyle you want to lead when you wind down from work. Try the AMP retirement simulator to find out how much you’ll need. 

Also consider the impact on your Centrelink entitlements. If you’re receiving benefits, such as the Age Pension for example, a loan or gift to your child may impact on your payments and your financial security. You must tell Centrelink about any gifts or transfers within 14 days of when they have occurred. 

Going guarantor

This is one way to help your family own their tomorrow whether it’s buying a car or first home, but be careful not to put your own home or lifestyle at risk in the process. Make sure you only go guarantor for an amount that you can comfortably afford to pay if your family defaults on payments. 

What else to consider

Whatever option you choose to help support your family: 

  • Make sure the loan or gift is within your budget and won’t affect your everyday lifestyle or retirement. 
  • You and your family might be interested to know that the new AMP Bett3r Accountcan help you manage your money, with pay, save and spend accounts. 
  • Consider taking out insurance to cover you, or your family member, in the event of unforeseen circumstances. 
  • It’s a good idea to get in contact with us if you would like to discuss your circumstances.

 

 

© AMP Life Limited. First published 13 April 2017

 

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