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Why You Should Be Thinking Of Tax, Repayments & More When Offering A Loan

It is easy not to think twice when you want to help out your children. But when it comes to loaning them money, parents should take into consideration what could happen if the arrangement goes sour.

It is natural for parents to want to support their children, even after they have up and left the nest to start their own life. Quite often, that support can involve providing financial assistance in the form of a loan.

Many young adults seek financial help from their parents if they encounter difficulty securing enough money for a down payment on a new home, a business venture or some other major expense.

In many cases, parents are more than willing to help give their children a financial boost, and in most scenarios, these parent-child loans can go quite smoothly. However, loans that are not paid back as agreed by both parties can cause great anguish for a family, and result in relationship breakdowns.

Since quite a few tax traps and legal pitfalls can arise when a loan agreement doesn’t work out, parents should carefully consider the implications of lending money to their children before doing so.

Proper documentation of a loan can avoid many complications. For example, if the child receiving the loan was to divorce from their partner, a written document identifying who handles the repayments can prevent the former partner from refusing to share the responsibility of the repayment.

For tax purposes, parents should also include a repayment schedule, repayment records and a plan that determines how the loan will be repaid as scheduled. If applicable, parents should also include proof that the child was credit-worthy when the loan was originally made.

Lending money to your children may have certain tax consequences for you as a parent, so it is also important to weigh up the likelihood of your child’s follow-through. Parents need to think carefully before lending money for a risky venture unless they are prepared to part with it as a gift with possible tax consequences. It may also be beneficial for parents to consider seeking professional or legal advice when before committing to the loan.

If you’re someone who often finds it difficult to make large lump sum payments for goods or services, you may want to consider looking into “Buy Now Pay Later” services.

Buy now pay later essentially means that, rather than paying in a full lump sum payment for a product or services rendered, there may be an option to pay through instalments of a certain amount over a set period to make the sum of the full amount in total. This method should allow you to pay in full for the product or service without overly straining your finances – you pay back what you can, as agreed upon when you begin the buy now pay later service.

Some popular buy now pay later services include Afterpay, Zip Pay, Brightepay, and some credit card networks such as  Mastercard and Visa, can offer buy now pay later arrangements.

Though it can be a convenient, immediate solution, it may be challenging to juggle the necessary repayments with other financial commitments. It’s not always the most appropriate method for people, and you should bear in mind your situation and ability in paying back the amounts. 

Before you sign up, keep in mind: 

  • It becomes easier to overspend with buy now pay later services, so know your limits on what you can and can’t afford.
  • You will be charged fees and costs to use the service, which can add up to a princely sum in and of itself.
  • Keeping track of your payments can be tricky if you’ve signed up for multiple services.
  • It could affect your loan applications for a car or mortgage as lenders consider buy now pay later spending just as much as your credit score.
  • Late repayments can appear on your credit report, which affects your ability to borrow money in the future.
  • Layby can be a cheaper alternative to buy now pay later, with no account-keeping or late fees to consider

If you are someone who could make use of BNPL services, you may wish to:

  • Ensure that when using the BNPL service, you stick to a set limit on what you spend so that you can comfortably pay it back later. 
  • Aim only to have one BNPL account at a time to manage payments through, rather than confuse yourself with multiple payments across different providers.
  • Always budget for bills, loan payments and BNPL payments, and 
  • Rather than use your credit card for payments to your BNPL account, consider linking to your debit account instead.

If you would like assistance in planning your financial future, help in managing your budget or some friendly advice, see us for a chat about what we can do for you.

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I have used Jane & the team for the last 6 years for all of my business & personal accounting needs. They have always been professional, easy to talk to & available when we have needed assistance.

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John Briggs

Jane Noller has been my accountant for the last 15 plus years. I can testify to Jane’s professionalism and expeditious manner in dealing with the day to day issues that surrounds our business accounting.

John Briggs

Registered Building Certifier