If a family member asks to borrow money from you or asks you to take out a loan on their behalf, saying ‘no’ can be tricky. Angelique Ruzicka looks at the risks of doing this.
Your family members may have asked to borrow money from you now and again. But, they are now asking you for more or to borrow money on their behalf. This increases your debt obligations and expenses. The question is: ‘Should you carry on lending them money or even take out a loan when you have your own responsibilities?’ If you’re in this situation, you’re not alone. Looking at global borrowing habits in 2014, the World Bank’s Global Findex report states that 30% of South African adults admitted that they would not be able to raise funds in a crisis if they needed to do this within a month. In addition, figures showed that only 12% of South Africans borrowed from a formal financial institution, while 71.2% borrowed from family and friends. ‘Black Tax’ is another reason why people are heavily reliant on family to bail them out. The term refers to the fact that black professionals often have to support their extended families. This may be because an aunt, parent or cousin gave you clothes, put you through school or loaned you money when you were growing up, making it difficult to turn them down.
What should you do?
If the family member in question is bad at managing their money and constantly in debt, you could be exposing yourself to financial risk. This is particularly so if you don’t have the money to give them and have to apply for a loan on their behalf. ‘You should avoid taking a loan on behalf of your family because it could result in you losing your money. If they fail to make their payment obligations, you will become liable for the repayment of the loan. This could put valuable assets such as your house or car at risk of being repossessed. Also, this could result in your personal relationship breaking down,’ warns Seth Whitehead, marketing manager of debt
counselling firm DebtBusters. Because you will ultimately be responsible for the loan if they don’t pay, making it a formal agreement would be sensible in such instances. This is according to Rekha Ramcharan, managing executive of personal and business lending at Absa retail and business banking. ‘If you take a loan for family, treat it like you would any other formal agreement. Put it in writing, just in case they later refuse to repay you or claim that they did not ask you to take a loan for them,’ she advises.
Short and long-term risks
Over the short term, the loan is recorded against your name, and this will affect your credit record. If you can’t pay it back or do so timeously, it affects your credit score negatively. This could result in you not being able to borrow in the future. ‘If you default on the repayments, you will incur further charges and costs,’ explains Rekha. You also need to take the long-term impact into account. “You may need to borrow money for your own needs. And if you have existing loans to repay, this will affect how much you can borrow. If you are in default, legal action may be taken, including a judgement against your name while your belongings may be repossessed,’ she warns.
Can you get out of it?
There are many reasons why you would want to help your family. But equally, there will be many reasons why you may want to get out of the arrangement. This includes perhaps finding a partner that you want to buy a home with or discovering that you’re expecting a child. Both come with financial obligations. If you have an outstanding loan, getting more credit to buy a home may be difficult. Also, going into debt with your family can bring about its own stress and strife. Should you not get along with them anymore, you may want out of the arrangement. This won’t be easy. But, Rekha recommends the following:
– Approach the lender and try to reach a settlement that will release you as the co-borrower.
– Ask another family member to stand in for you. ‘If they agree, the bank will perform a credit assessment and require them to sign a new agreement.’
– The final solution is more drastic. ‘You can repay the loan, and then take legal action against your family member for their share that you repaid.’ Weigh this option out carefully as it may cause conflict within the family.
Also see: A guide on family therapy
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