Understand that you may not get your money back
In a US study, Bankrate suggests that 46% of adults who lent money to friends and family be wasted money (37%) or their relationship with the borrower was damaged (21%).
That’s why people need to think carefully before lending money, says Jessica Moorhouse, money expert and financial educator.
“When you lend or borrow money from a friend or family member, it automatically adds an extra layer of complexity to that relationship since you’ve just introduced a new power dynamic,” she explains. .
If you decide to lend money, there are some things to keep in mind. Will lending money strain your own relationship? Can you afford to lend money in the first place and feel no strain? Will it help the person borrowing the money and will you be okay if you are never repaid?
The answer to these questions will determine if you should lend money. Even if the loan won’t strain your finances or a relationship – and you’re okay with not being repaid – it’s still important to consider how the money will be used.
“If you see someone asking for financial help, but they need help that goes beyond that, like health, addictions and mental health, the money may not be not what it needs and may even make things worse or prolong the real problem,” Moorhouse says. .
What are the legal implications?
However, there are situations where lending money may be appropriate, such as a parental loan for a down payment on a house. This is distinct from a donation, which has no interest or repayment terms.
It is understood the loan will be repaid, but Moorhouse highlighted the potential tax implications.
“If you lend money and expect interest payments, this must be reported as income on your tax return. There are also tax implications if you lend money to your children to buy a house. , so it’s important to talk to a tax professional or financial planner before lending money.
If you decide to lend someone money, Moorhouse says it’s always good to get it in writing. However, the risk of non-payment remains.
“It is always advisable to obtain it in writing by means of a promissory note, contract or other type of document. That said, only you can be the judge if you think you will be reimbursed or not,” she says.
“In my family, we don’t believe in loans. We only do giveaways. This alleviates any potential tension that exchanging money may produce.
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