Family and money don’t mix. You’ve probably heard that. Or was it friends and money?
Regardless, loans between loved ones can be tricky!
Still, with property affordability getting increasingly problematic for some, many first homebuyers are reaching out to their families for financial assistance to help increase their borrowing power.
Partnering up can help reduce the financial burden and even enable you to afford a better quality property with more significant growth potential. However, it’s not a decision you should make lightly.
If you’re planning to borrow money from a loved one, here are a few essential things to consider:
1. Improve your financial situation first.
Before asking for a loan, make sure you’ve already taken steps towards improving your finances:
If you haven’t already, start a budget and follow it.
- Track your expenses to find any money drains.
- Call your utility providers and ask if you’re getting the best deal.
- Consolidate credit card debt.
- Explore other ways of earning money.
- Start building an emergency fund for future mishaps or unexpected expenses.
If you’re not ready to improve your financial situation, you aren’t ready to take the responsibility of a loan from a relative.
2. Discuss repayment expectations
Borrowers and lenders may have different expectations when it comes to repayments. Make sure both parties are on the same page about how and when you will repay the money. Is interest going to be charged? How long will it take for the loan to be repaid?
3. Set up your loan documentation.
Seeking legal help is strongly advised to ensure each party understands their financial and legal obligations. You don’t want a financial transaction to come between you and your family.
4. Don’t be late!
Once you agree to the terms of repayment, stick to it. Pay your loan by the due date, and don’t make excuses. Remember, this is more than just a business transaction; it’s a personal relationship.
5. Pay the loan off early.
Adding a financial relationship on top of a social one can be complex. If your financial situation improves before the end of the loan’s period, pay it off early.
If you are considering this option, you may find it helpful to speak to a financial planner. There are benefits to be gained, but it is critical to weigh up the risks just like with every significant financial decision you make.
Talk to a financial adviser today.