Wednesday, June 17, 2009

Borrowing trouble – Loans to family

When a relative or friend calls asking for a loan, you want to help. It’s only natural – and you’re far from alone. A recent Investors Group poll found that six in ten Canadians (64 per cent) have loaned or borrowed more than $500 to or from family or friends.

However, your good deed could end up creating a lot of stress for you and placing a great deal of strain on your relationship with the person to whom you made the loan. It could also cost you a significant amount of money.

More than a quarter (26 per cent) of those polled reported that family/friend loans were not fully repaid. One-third (31 per cent) of the money lenders felt pressured to do so, and the majority of those who experienced the greatest feeling of pressure (54 per cent) did not get repaid at all.

The majority of loans between friends or family were for moderate amounts, with two-thirds (67 per cent) borrowing between $500 and $5,000 and 14 per cent borrowing between $5,000 and $10,000. Fifteen per cent borrowed 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 (5 per cent), taking a vacation (5 per cent) or another big event (3 per cent).

And here’s the crucial part: The survey found that more than eight in ten (83 per cent of) Canadians who had loaned or borrowed funds from someone close to them did so without a written agreement.

That’s always a mistake. Sure, it can be uncomfortable to make an informal request for a loan into a formal ‘business’ transaction. But loaning money to a loved one shouldn’t preclude asking for specific loan conditions or a pay-back plan, and doing so can reduce the potential for disagreements and long-term future rifts. By having a formal agreement for a personal loan you’ll avoid borrowing trouble.

If you simply can’t bring yourself to request a written agreement, get help. Your professional advisor can provide assistance that won’t get in the way of your relationship. Your advisor can also help you assess 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

John Scholl B. Mathematics, CGA, Picture (Device Independent Bitmap)

Wealth Management & Financial Planning

Investors Group (905) 450-2891 X529 (866) 799-2223 Cell: (416) 731-3660


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