The Dangers of Borrowing and Lending Money in Families

photo credit: mrhayata

Experts say that especially in tough economic times like these, lending money within a family is getting increasingly common. But borrowing money from parents or siblings is a risky business and one which The Age thinks should be avoided wherever possible.

If you absolutely feel that lending or borrowing money between you and your family members is necessary, here are some pieces of advice to follow:

• Put the loan in writing. Even if it’s a little awkward to discuss that at the time, it’s better than creating a large dispute later. Where possible, draw the arrangement up as officially as possible.
• Only lend money that you are prepared to lose. You never know what could happen in the future. Apparently a worrying trend amongst parents with adult children is that they are lending them money by remortgaging their houses, and if the adult child is unable to repay the money, the elderly parents lose their house - and of course the relationships between them get very strained.
• Avoid reverse mortgages for this purpose - the reverse mortgage allows retirees to use equity in their home to obtain cash which is repaid when they later sell the house to move into care or when they die. Here the risk of losing a house increases again.
• Be open, honest and up front about every part of the deal, and if you have any doubts at all, say no. Just consider whether your relationship with the family member is more important than money or not. Usually the relationship wins and it’s not worth risking it over money.