Murky overlap between finance and family

RICHARD MEADOWS

My grandfather, a grizzled veteran and working class man, had a remarkable capacity for quoting Shakespeare. One of his favourite maxims, trotted out on a regular basis, was "neither a borrower nor a lender be".

But it's the next line of that old chestnut that most people are less familiar with:

"For loan oft loses both itself and friend."

There's a murky area in the overlap between finance, family and friendship. A loan to a loved one, turned sour, can cause family feuding and ruin relationships. But it doesn't have to be that way.

Stuart & Carlyon financial adviser Deborah Carlyon says it's important to find out what the money is for right from the get-go.

Putting up some cash to help a friend buy a car so they can transport themselves to a new job is great.

Lending money to your deadbeat sister so she can fund her gambling addiction and indulge a fondness for designer clothing is enabling behaviour.

"If you're lending money to someone because they can't make ends meet, or they're no good at budgeting, or they spend too much money themselves, that's an opportunity for the person who's being asked to say 'well, hold on a minute here','' Carlyon says.

At the point where someone asks for a loan, they've effectively opened up their financial affairs for you to poke your nose in, she says. If you think they need to sort their finances out you can intervene, and perhaps offer help in other ways.

"That's why people shouldn't really borrow money from friends or family - they're likely to get a bit of lecture!"

PUT IT IN WRITING

"Be careful about lending a friend money. It may damage her memory."

Not the Bard this time, but an anonymous wag. If you've judged your friend and found them worthy of your glorious benefaction, the next step is to put the loan in writing.

When Aucklander Jordan Bradly lent money to an unemployed friend several years ago, the whole affair was pretty vague.

He kept a tally of the loans in his head but it took several years to get the full balance back - and even then only after taking a blunter approach.

"What really started annoying me, and made me actively ask for my money, was he got a good job and started buying all this other stuff - TVs, computer, playstation."

At the time, Bradly didn't even consider drafting any kind of agreement.

"That's the problem when you deal with friends and family - it's awkward to have a contract of finance... [It's] really cold, sort of like a business transaction."

While the experience hasn't put him off, he says it's going to be different next time.

"In the future, I would probably set up some definite ground rules for doing it such as a due date, and actually put that in writing."

No matter how "awkward" or "cold", it can't be as awkward as having to go to court with a family member.

Fitzherbert Rowe solicitor Rory Scott explains that when verbal agreements are contested, they essentially become a he-said/she-said situation.

"It's the fact that the good relationship exists from the outset that leads them into problems - no-one in the real commercial world does anything without a written contract."

That written agreement doesn't necessarily have to be drafted by a lawyer, full of long words and clauses or witnessed by two solemn men in dark suits.

But the more legitimate it is, the better it will stand up in court should the worst occur.

The real benefit of having it in writing, is that it removes ambiguity so both parties are on the same page, Fortifi financial adviser Bruce Edmonds says.

Edmonds has seen plenty of occasions where people have made verbal agreements in good faith, but interpreted it very differently.

"It's not necessarily anyone being malicious - it's just that their expectations are quite different."

SET CLEAR TERMS

All the experts agree that any written agreement should cover the following:

- When the payments fall due

- Whether it's paid back in instalments or lump sums

- The date or dates for repayment

- Whether interest will be paid, and at what rate

- What happens if the loan goes belly-up

All of this will be difficult to cram in if the agreement is being scrawled on the back of a napkin in felt-tip pen. But it's crucial to at least settle on a repayment date, especially for a longer term loan.

Under the Limitations Act, creditors have a six-year period to reclaim debts after they come due. Without a due date, that presents some problems.

"Under the standard commercial practice, and in the absence of a specified due date, as soon as that money is advanced it becomes due," Scott says.

This means if you let a debt slide and don't bother pursuing it for a few years, you might miss your window to get it back altogether.

PERSONAL OR BUSINESS?

Your adult son reckons he's onto a winning business idea. Family and friends have already ploughed a fair bit of cash in, but it's still losing money. You decide to take a chance and invest $75,000. A foolish move, surely?

Not if your names are Jo and Gareth Morgan. When entrepreneur son Sam flicked off his online auction site TradeMe in 2006 for a cool $750 million, the leap of faith netted mum and dad around $50m. Quite a return on investment.

Or take Auckland healthcare software company Orion Health. This year it's set to make revenue of more than $100m, and has got its sights set on $1 billion. But back in the early stages founder and owner Ian McCrae used to hit up his big brother Gordon for loans.

If no-one was prepared to take a chance on loaning to family or friends, plenty of Kiwi start-ups would never get off the ground.

Of course, it's entirely possible that Morgan or McCrae would have scratched up the funds from elsewhere. And the other sad truth to bear in mind is that many new companies fall flat on their faces, something to consider if your darling child is convinced they've come up with the next TradeMe.

ELDER ABUSE

It's a parental instinct to want to help their children. And it's perfectly natural that adult children with cashflow problems or business opportunities might ask their parents for help.

But when that relationship is put under too much pressure it can become abuse, Age Concern national president Liz Baxendine says.

"It's a rather sad state of affairs, but when things are getting tougher all round, that's what happens."

She stresses that in most cases, parent/child loans are perfectly innocuous and mutually agreed upon. But unfortunately that's not always the case.

"There have been occasions when younger family members have said 'sign up on this or I won't come and see you'. It's like emotional blackmail. It's horrid, but it's there."

Says Carlyon: "A lot of our job is to remind people, if they're living off an investment portfolio, of the implications of taking some money out of that and lending it to their children and not charging interest."

Elderly people are often the victim of unfair expectations. Carlyon points out that even for those with a fair whack of money in the bank, the lack of steady income from working can make retirement quite scary.

Even though younger people might perceive the elderly to be wealthy, in many cases they rely on investment income to top up their super. Take away a chunk of cash without any returns, and they have to get by on less.

NO MONEY-BACK GUARANTEE

One of the ways elder abuse manifests itself is through being pressured into guaranteeing a family member's contract, Baxendine says. But the risks apply to everyone.

If your favourite nephew asks you to underwrite a loan or co-sign for a hire purchase, be very wary of exactly what you are getting into. If he doesn't make the repayments, you will become liable for the entire loan and all associated costs.

Even if he's got a heart of gold and the best intentions, any unexpected events could leave you saddled with an unwanted debt.

Sorted.org.nz recommends considering the following factors before agreeing to be a guarantor:

- What is the maximum you might have to pay, including penalty fees, interest and any other charges?

- What will the money be used for, and what are the risks if things go wrong?

- Can you afford to repay the loan without risking your home or retirement savings?

It also raises the question of why your nephew might need a guarantor in the first place - does he have a dodgy credit rating? The last thing you want is to have the borrower default on the loan and leave you in the lurch.

GET ADVICE

Dealing with a request for a loan by a loved one can be uncomfortable, to say the least. But rather than feeling flustered into agreeing on the spot, at least stall for time.

Baxendine says it's often useful to get advice before agreeing to anything, especially for older people. That can be through Age Concern, the Citizens Advice Bureau, a solicitor, financial adviser or other third party.

Getting legal or financial advice is more or less a no-brainer when you're dealing with larger sums of money, business-related loans or signing on as guarantor.

However, Edmonds says there's no concrete threshold of assets above which you should take advice.

It all comes down to personal circumstances - some people might lend $1000 on a handshake and think nothing of it.

Getting independent advice is good for a handy scapegoat, too. If you decide to turn down a loan, you can always blame it on the third party to soften the blow a little.

REDEFINE 'LOAN'

Contracts, solicitors, terms, return on investment. For some people, this is probably all starting to sound a bit too cold and impersonal.

If you're in a comfortable financial position and can afford to be generous, then consider redefining your expectations when making loans.

"A number of people lending money to families may consider that while it's called a loan, it's really a gift in their mind," Edmonds says.

That way, any money you contribute has already been earmarked as gone for good, and anything that comes back to you is a welcome bonus.

After all, Edmonds says, in most cases "the social obligation is a higher priority than the financial considerations".

Loans to family and friends won't bolster your own finance, but that shouldn't matter. It's not about turning a profit, but lending a helping hand in a time of need.

Building up social capital is always valuable too - you never know when you might be on the receiving end.

- Have you ever lent money to a friend or family member? Did it work out, and would you do it again? Leave your comments below.

- © Fairfax NZ News