Bank of who? Borrowing from friends and family when purchasing property
More and more homebuyers are turning to their family and friends for help with financing their property purchases. Whether you are a first time buyer or you are simply waiting for another property sale to go through before being able to produce the required funds for your purchase, there are many important factors to consider before agreeing to borrow money from friends or family.
There are clear advantages to financing a purchase by way of private loan from a family member or friend, for example, your family member or friend may not require the loan to be secured and may lend funds interest free. Family and friends are also more familiar with your circumstances and are less likely to want to see a detailed plan on how you intend to repay the loan.
Nonetheless, borrowing money from a friend or family can be complex and any misunderstandings can have a negative impact on relationships. You must also bear in mind that should you also be having mortgage, your lender will need to be aware of the amount you are borrowing in addition to the mortgage and they may not lend if they believe you are taking on too much debt.
Things to Consider When Taking a Private Loan
Whether you need money to tide you over until payday or lack sufficient credit history to qualify for a mortgage, getting a private loan can be a quick, no-fuss option. However, borrowing money from family and friends may not always work and comes with considerable risk. Before taking a loan from anyone, you should carefully consider the following:
- What are the terms of the loan?
It is important that any expectations and obligations are outlined from the offset otherwise you could end up in a situation where both you and the person loaning you the money make assumptions about how repayment will be handled in the future which can be awkward for you both. You should consider whether there will be any interest added, and when payment is due and in what amount. Most importantly, you should consider how you will handle any potential problems that may arise.
- Are you dependent on the sale of another property to repay the loan?
If you are having a private loan to bridge the gap between your sale completing and your purchase completing, you should consider what would happen in the event your sale falls through. Do you have funds in place to continue making repayments for longer than anticipated?
- Can you afford it?
First and foremost, you must consider whether you can afford to borrow. Do you have enough of a buffer in place should there be a change in your circumstances? Not being able to pay back a family member or friend can damage relationships and also put their finances at risk.
- What would happen if the person lending the money dies?
When somebody dies, all of their money, possessions, and assets from part of their estate. Money loaned to you would be considered an asset of the deceased as it is money which the estate has a right to. The personal representative of the deceased could be entitled to insist on the immediate repayment of any loans and in this instance, you must consider whether you can procure the funds to repay any monies borrowed from the deceased in an instance.
- Keeping Record
Once monies have been transferred to your account, the loan has essentially taken effect and now it is vital that you keep records of the initial transfer date, any repayment dates and the amount that has been repaid.
- Having a private loan won’t improve your credit history
Loaning money from a friend or family member will not build up or improve your credit score. Having a good credit score will help you access better lending in the future with access to more competitive mortgage deals and credit card rates.
If you are the Lender
If you are the person lending the money, you should also consider how your finances will be affected: do you have finance in place to cover your outgoings should the borrower miss payments? It is important that you do not let friends or family member’s guilt you into lending more money than you can afford. If you expect to be repaid with no delay or excuses, then it is vital to be selective about who you offer a loan to. Repeatedly having to approach the borrower for overdue payments will be awkward and could end up damaging your relationship with them.
Why You Should Consider a Loan Agreement
Borrowing money is a big commitment no matter the amount. Loan agreements are an essential part of borrowing money and are put in place to protect both the borrower and the lender. A loan agreement will detail the amount of credit, the rates of any interest or fees payable and the payment terms. Laying out such details will leave no room for assumptions as the agreement will detail exactly what is given and what is expected in return.
Furthermore, not only does a loan agreement protect both the borrower and lender, it also serves as proof that the loan was not a gift. This is important as it will prevent a borrower from trying to get out of repaying the loan by claiming that the loan was a gift which is one of the most common defences to a dispute about a loan between friends or family.
If you are trying to determine whether you need a loan agreement, it is always best to be on the safe side and have one drafted.