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OPINION: The Bank of Mum and Dad is open 24/7, has the lowest loan interest rates in town, and is very lenient on missed repayments; sometimes writing off the debt completely.
Within the same banking group are the Grandma Bank, the Uncle Fred Bank and the My Best Friend Bank. Occasionally you can come across a My Wealthy Child Bank.
These banks certainly make life easy for the borrower, but are they making sensible financial decisions for themselves?
There is an element of emotion involved, ranging from a sense of duty right up to emotional blackmail – “If you love me why wouldn’t you lend me the money?”
It is very hard to say no when someone you care for deeply is in financial need. Emotions cloud judgement. No doubt it has been this way for as long as money has existed. In Shakespeare’s Hamlet, Polonius, when asked why we shouldn’t lend money to family and friends, replies: “For loan oft loses both itself and friend.”
This needn’t be the case, however, if an objective, considered approach is taken to the arrangement. That doesn’t mean being cold and heartless, it just means being clear about what is being agreed to and ensuring it is a win-win deal.
If you have been asked to lend money to a family member or friend, there are some key questions to be asked.
What is the money needed for?
There is a big difference between lending money as a deposit for a house and bailing someone out of massive debt. Chances are, if someone hasn’t been good at managing their own money, they will be even more careless with yours. It’s good to be able to help a family member or friend get ahead but they have to play their part too and act responsibly.
If a bank won’t lend the money, this may indicate the person is considered to be a high-risk borrower who is more likely to default on payments. Check the financial situation of the borrower in exactly the same way as a bank would do so you know what risk you are taking on. The bigger the amount, the more rigorous you need to be.
Can you truly afford to help?
It is great to be able to help others but giving too much can undermine your own financial situation in the long term. If you give or lend more than you can afford, eventually you will be unable to help others and you may need help yourself.
There are significant risks involved in lending money to friends and family. Play it safe by only lending what you can afford to lose.
What are the terms and conditions?
Be clear at the outset as to whether the money handed over is a loan or a gift, whether any interest is payable and at what rate, when repayments are expected and what happens in the event that repayments are late or missed. The bigger the amount involved, the more important it is to document the terms and conditions upfront so there is no misunderstanding. This may sound a bit heavy-handed when dealing with family, but it means there is less room for disagreement down the track.
How will other family members feel about the arrangement?
Consider whether your partner and immediate family should be consulted or informed before you make the loan. Family relationships can be put under strain when a loan is seen by others to be secretive, unfair, unduly advantageous, or inappropriate.
What legal implications are there?
Be particularly careful when lending or giving money to adult children who are in a relationship. Should the relationship come to an end, your funds may well be caught up in a relationship property settlement which benefits your child’s partner and leaves you out of pocket. When a significant sum is involved, get legal advice before handing over the money.
Having considered all these questions, don’t ever be afraid to say no.
Don’t be held to ransom or feel that you are failing in your duty as a family member or friend. Sometimes the best way you can help another person is to provide them with the advice and support they need to solve their financial problems for themselves.
* Liz Koh is an authorised financial adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.
Continue reading this article at the original source from Stuff.co.nz
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