Mom and Dad’s Bank is one of the top five lenders in the country. And right now, that’s the kind of financing option that many of us might be considering.
Thanks to the coronavirus pandemic, Australians are doing things doggedly, so it’s understandable that a loan from loved ones might be needed, whether it’s our parents, siblings or friends.
As with any loan, there are risks. In this case, the most important thing is to burn the relationship.
“The biggest payoff isn’t financial, it’s emotional,” said Sunshine Coast lawyer Samantha Bolton.
But if you do it right, it can be a deal that gets you through a tough time with the relationship intact.
We spoke to three experts and a young woman who managed to borrow money from a friend for her advice.
Work on the details
When borrowing money from someone you know, it’s important to agree to the loan parameters, says Bolton.
“You have to have these conversations, like you’re going to borrow from a bank,” she says.
“What are the repayment expectations, how will the loan be repaid, within what time frame, is the interest payable?
“Do you have a backup plan if you fall behind on repayments? “
She says it’s very common for people to fall into the “pay it back whenever you can” trap, but it can create problems down the line.
Valerie Fuentes, 36, twice borrowed $ 5,000 from a best friend to help him find a place to live.
“In order to have a new place here in Miami [Florida] you have to pay three months rent, which is a lot of money, ”she says.
Valérie says borrowing from a friend rather than a bank motivated her more to repay.
“I have no motivation to pay someone I don’t care about.
“I always provided a scheduled return time and kept my word. Both times I paid it within three months.”
A verbal agreement has legal value, but writing it down means a dispute is less likely, says Bolton.
She recommends documenting the arrangement, even if it’s just something you wrote down at home.
“Imagine you have a 10-year loan term and suddenly someone brings up an issue. It can be hard to remember the conversation you had.”
Ms Bolton says both parties should sign the document and have a copy each.
Financial advisor Melissa Browne agrees, saying a paper trail of any kind is better than nothing.
“Even for $ 500, I would flip through an email, just confirming the term of the loan, this is how repayments will work, and a backup if it can’t be paid on time.”
When to hire a financial planner and lawyer
If the loan amount is large, our experts recommend consulting a financial planner and / or lawyer.
What is considered a large amount of money will depend on you and your circumstances.
“You’re not going to spend $ 2,000 to have a lawyer set up something for a $ 2,000 loan,” says Bolton.
“If they were loaning $ 30,000 payable over 10 years, you would probably want more detailed advice.
“When Lawyers Establish It, They Set More Up For Contingencies Than You Think [on your own]. We’re still thinking, what if ‘this’ or ‘that’ goes wrong? “
Or you can draft the document yourself and pay to have it reviewed, says Bolton.
Wayne Leggett is a Certified Financial Planner and a member of the Financial Planning Association of Australia.
He says financial planners can’t give legal advice, but can help you figure out what’s reasonable in terms of repayments and interest, for example.
“They can potentially solve problems like: what if the lender died before it was paid off, what’s the plan for that?”
He says that sometimes loved one loans can also be mutually beneficial – something a financial advisor can help.
As an example, he says you might be able to agree to a higher interest rate than someone might get with a term deposit, but lower than someone would have to pay. ‘he was borrowing from a bank.
If you are blocked, contact
If you can’t pay it back, Browne says it’s best to be frank.
“Communicate and do it early. Let them know what happened and what you are doing as a result.
“Forthcoming [your lender] with a plan. “
For example, you might be considering selling something to cover the reimbursement.
Valérie said her friend’s loans meant a lot.
“She saved me twice. The first was around a pretty bad breakup so I had to get out.
“The second, I was living with my husband at my mother-in-law’s house and I desperately wanted to get out too.”
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