Here's Why You Should Never Loan Money To Relatives (4)Imagine this: Your close family member is in a bit of a financial fix and comes to you for help. Because you believe that “blood is thicker than water”, you end up giving them money in the form of a loan, but deep in your heart know that you might never see your cash again.

It’s common and completely natural to want to be more generous with your kin. For instance, parents would want to help your children out with their student loans or even a down payment on their first property.

But lending money to your family members can create all sorts of problems in future and strain familial bonds, so it’s important to know upfront 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.

Read on to find out the key factors that you need to consider when lending money to your family members:

Here's Why You Should Never Loan Money To Relatives (3)
1. 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.

Here's Why You Should Never Loan Money To Relatives

2. Make sure to file 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 they’re due.

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3. What should you do 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 drama with your family members, this can impact on any 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.

If you are considering lending money to your children or other family members and have any uncertainties 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.

For more money management tips, read 6 Money Tips Couples Must Know For A Successful MarriageAre You Making These Terrible Money Habits? and 5 Money-Savvy Things To Do With Your Pay Raise Or Bonus This Year

Text: Jarrad Brown / Additional Reporting: Elizabeth Liew
Photos: Pixabay

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