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G & J

Lending Money to Friends and Family

16 Feb 2016

Many people get asked the question,” should we lend money to friends or family?” While it is nice to help people, lending money on an informal basis can be a recipe for disaster. If there are any problems, friendships or family relationships can be irreparably harmed.

There are a number of problems that could arise. You may not be able to enforce repayment and if problems occur, your relationship with the borrower may become very difficult. If you are even considering lending money, make sure you have a written agreement signed by all parties to record the purpose and amount of the loan, the rate of interest, the frequency and amount of repayments, the time frame for repayment and how late penalty payments will be dealt with.

Insist the borrower make repayments by regular automatic payment. If they default on any payment, take action as soon as it happens. Don’t wait another month. If they cannot make the payment, the chances are they are on a one-way path, and the outcome for you the lender is going to be poor.

Ask for evidence from the prospective borrower that other options for borrowing have been explored. If the borrower has been turned down, there needs to be a reason. It could be that there have been problems in the past, or that they cannot obtain insurance as they may have a conviction that you did not know about.

The borrower may already have a large amount of debt that they are struggling with. Make sure you have a verified set of financial statements from the borrower before you even consider the viability of lending him or her money. What would happen to their debt repayment ability if they lost their job, or had an illness whereby they could not work? Most households will really struggle financially after paying three months of outgoings.

What happens if the borrower uses the money for a different purpose to what you lent it for? For instance, unbeknown to you the borrower may have a gambling problem or you unknowingly gave him or her a start in an illicit business. Ensure the money is used as agreed, for example by making the payment directly to the third party. This may be, for instance, a builder or a plumber, or an appliance store.

What happens if the borrower dies, or has a relationship breakdown before they repay you? If there is no proper loan documentation the executor may not know about or recognise it. Equally the former partner may not know about it which will cause problems relating to the property relationship.

Don’t lend money you can’t afford to lose. This should be a golden rule. Adult children often have no real idea of how much money their parents really have. What may seem like a small loan to the borrowing child could make a real hole in the funding of the parents’ retirement lifestyle. Definitely do not become guarantor for the borrower.

Remember money is easily replaced. Relationships with good friends and family are not. Lending money to people you know should be done as a last resort and with extreme caution.


Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.