The trouble with loans to family or friends
A friend or relative asks you for a loan. You want to help, of course, because you care. According to an Investors Group poll* 64 per cent of Canadians surveyed agree with you, having loaned or borrowed more than $500 to or from family or friends. But your loan could prompt a payback you don’t expect, like stressing and straining your relationship with the borrower to the breaking point and beyond, and it could cost you a lot of money if the loan is not repaid.
Of those polled, 26 per cent reported that family/friend loans were not fully repaid. 31 per cent of the money lenders felt pressured to make the loan, and the 54 per cent of those who experienced the greatest feeling of pressure did not get repaid at all.
The majority of loans between friends or family were for moderate amounts, with 67 per cent borrowing between $500 and $5,000, 14 per cent borrowing between $5,000 and $10,000, and 15 per cent borrowing more than $10,000.
For both lenders and borrowers, top loan purposes were financial emergencies (25 per cent), big-ticket purchases (15 per cent), education (13 per cent) and a home down payment (11 per cent). Lesser priorities were house repairs (7 per cent), starting a business or taking a vacation (both at 5 per cent) or another big event (3 per cent).
One of the biggest mistakes that lenders to family or friends make is providing the loan without a written agreement. 83 per cent of survey respondents said they made that mistake, and it’s easy to see why because a demand for formal documentation can be viewed by either party as a sign of mistrust. But that shouldn’t be the case. Asking for specific loan conditions or a pay-back plan in a written agreement will actually help you avoid trouble by reducing the potential for disagreements and relationship rifts.
If you can’t bring yourself to ask for a written agreement, you should probably look for some help.
Your professional advisor can act as your mediator in a way that will not strain your relationship and a lawyer may be required to draft the written agreement. Your advisor can also show you how that loan could affect your overall financial objectives.
*A total of 2,002 surveys were completed with Canadian adults between September 18th and September 24th 2008, using the Harris/Decima eVox online panel. The data is weighted in tabulation to replicate actual population distribution by age and sex within each region according to the 2006 Census data.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
Contact David Brown at 250-315-0241 or at email@example.com to book your appointment.