Lending money to your family members can create all sorts of problems in future, so it’s important that you’re well informed of exactly what you’re getting yourself into. Not only do you need to consider the personal implications of possible disputes, you also need to be aware of how such a scenario will impact your personal financial situation.
As parents, it’s common to want to help your children out, whether this be with their student loans, or a down payment on their first property. Here are the key factors that you need to consider when lending money to your family members.
Put it in writing
It’s important that you clearly outline the details and terms of the loan in writing, and that both parties sign the document. This should include the following:
- Loan amount
- Length of the loan term
- The interest rate that will be applied, if any
- When repayments are required to start
- The frequency of the repayments
- Penalties if repayments are not made
While the last point may sound slightly harsh for family members, the less potential for disagreement in future due to anything being unclear the better. Be sure that you and your family members are clear about the terms and details of the loan and leave no room for interpretation.
Filing your tax return
As a formal loan, it’s important that you include it in your tax return. Any interest that you receive from the loan must be declared in your tax return and tax paid where due.
What happens if the loan isn’t repaid?
If the loan isn’t repaid, or you decide to simply ‘forgive’ the loan because you don’t want to create any hassle or dramas with your family members, this can impact on pension or Centrelink payments that you’re receiving. The loan would be treated as a Gift and it’s important that you’re aware of how this can impact you. Read my article here on gifting impacts – http://singapore.feebasedfinancialadvice.com/top-finance-tips-for-new-grandparents/
If you are considering lending money to your children or other family members, if you have any uncertainty at all, it may be wise to simply find another avenue to help them out. Money is one of the most common causes of disputes with family members, so proceed with caution, and ensure that you’ve taken all of the necessary precautions.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
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