Lending money to family or friends: do you have carte blanche?

Lending your loved ones a financial hand seems to be a fairly logical step if you have set aside ample savings you are not going to need any time soon. However, there’s more to it than you might think. In this blog, we will guide you through the most important points to consider before lending money to a friend or family member.

Your best friend tells you their finances are tight right now and asks you for help. Your son or daughter found a home or really needs a car now and is asking you to help fund it. Or due to unforeseen circumstances, the renovations of a close family member may have overrun their budget and you want to help them out to prevent a delay in their long-awaited move.

There are many scenarios that can prompt you to lend money to family or friends. If this ever happens, it is good to have all the relevant information at your fingertips in advance.

But first: is lending money ever a good idea?

Showing someone you care is one thing. However, you shouldn't jump head first into a lending adventure without thinking. Five very important questions to ask yourself in advance:

• Is my own financial buffer sufficient to cover any unforeseen costs or my own instalments, for example?
• Can I do without this money for a long time?
• Will the family member or friend who is borrowing the money be able to pay me back without any problems?
• Do I trust this person, even in the event of any defaults?
• Would this loan jeopardise any relationships with other important friends or family members?

Okay, so you've decided you'll do it. Do you know who you should speak to?

If you answered yes to all the above questions and you want to take the next steps, how do you get started? You have two choices: either you arrange a private loan just between the two of you, or you register the loan officially with a notary.

The latter option is worth considering, especially if you are lending a large amount. If there is ever a disagreement, this will make the repayments far less troublesome.

Although it is not mandatory to use a notary, a detailed written agreement is always advisable. Documenting clear arrangements protects you against any misunderstandings and give you something to fall back on if things go wrong, even if, in a worst-case scenario, the facts are being legally disputed. You can add an extra layer of legal security by registering your private deed with the Federal Public Service for Finance.

What details should you always include in the agreement?

• Personal data about you and the person you are lending money to
• The borrowed amount in numerals and in words
• The loan term with the start date and final maturity date
• Is there any collateral or security to provide extra peace of mind?
• The practical process of the instalment payments: will you receive a set amount each month, every six months or every year? Will the money be transferred on a certain date?
• What is the purpose of the loan?
• The agreed interest rate (if you are charging interest, see below)
• The place and time of signature
• Some clear rules: what happens in the event of default or late payments, for example? What if the family situation changes, for example in case of a divorce?

Are you allowed to provide an interest-free loan?

Suppose you want to make things as easy and comfortable as possible for the friend or family member you are lending money to. You want to lend them the money and you do not expect them to pay any interest in return. In other words, you want to give them an interest-free loan.

In Belgium, you are allowed to set up such a structure, but this will have tax consequences:

• If you do not want to receive any interest, the tax authorities may charge taxes on the benefit the borrower enjoys compared to the current interest rates in the market.
• If you do want to receive interest, the lender will have to pay withholding tax on it and you must declare it in your tax return.

Although it is legally permitted, an interest-free loan therefore entails certain tax risks. You should also be aware that you will miss out on receiving any return on the money you have taken from your savings account of investment platform for a long time. So asking for a low interest rate could be an option.

What if things go wrong at some point?

Both you and the person asking you for financial help may be full of good intentions. Nevertheless, at some point things can go wrong, whether you are lending money to your own children or to one of your closest friends. Suddenly, the fixed repayments stop coming in. What do you do then?

• Talk first, then act: always talk to the person first to look for a solution, such as an instalment plan or temporary payment deferral. Also document these additional arrangements in a written and signed document.
• Consider bringing in an official mediator: if you lent a substantial amount to someone you are perhaps not that close to, a mediator or lawyer can help to untangle matters and make the necessary arrangements.
• Take the legal route: The final – and by far the least pleasant – remedy is court. As we mentioned above, an officially registered contract gives you a strong foundation.

To sum up: When you lend money, be smart and protect yourself

Lending money to a friend or family member is undoubtedly a big gesture. However, without a well-considered and legally sound approach, it could end up being a huge financial headache.

By assessing your own financial situation as realistically as possible in advance and putting clear agreements on paper, you avoid financial problems and any future tension in your relationships with good friends or close family members.

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