Lending money to an adult child

Yorky1

Could anyone advise on how to go about formally lending money to an adult (dependent) child?

The reason for the formality is to impress upon the child that it is not a gift and to avoid potential problems.

The intention is to redeem two existing credit union loans and the parents provide the loan at a lower interest rate.

The parents want to make a formal agreement detailing repayment schedule, term, interest rate, default/late payment penalties etc.

Would appreciate as much advice as possible on the above-mentioned.

Also the tax implications for receiving interest on the repayments.

(Not sure if this is the correct forum - moderators please move to more suitable forum if applicable)

Further info:

The existing loans are paid up to date with no missed payments
The parents are already guarantors for the existing loans
The motivation is to save the child money via a lower interest rate and provide a reasonable return for the parents

HappyMJ

It's very difficult to do as in the event of default you would have to take the child to court to enforce payment. The child would then have a CCJ recorded against them and in the process that destroys their credit rating.

What is the reason they need the money? If it's for a car then buy the car in your name and in the event of non payment take the car back.

If it's for a house then buy a percentage of the house and when the house is sold you get your percentage back.

You will not be able to enforce penalties in court so ignore them.

As you say it's to redeem existing loans...My opinion...don't do it. The interest on a credit union loan is only 1% per month which really is a reasonable rate so teach them budgeting skills to get the outstanding amount paid off ASAP.

You will also find it difficult enforcing the interest in court too. You can lend the money free of any interest and if the child chooses to give you some extra money as a thank you gift then there isn't any tax to pay.

[Deleted User]

All rather strange to profit from their own children...

I'd like to think parents would help their children out of debt by charging no interest. If they can afford to lend the sum of money, they probaby won't miss the interest lost.

It's fair that they want their money back, i'm sure it's a lot to them and for something important.

This seems like a really easy way to loose a relationship with a chid, in the event of unfotunate circumstaces meaning repayment is not possible.

I'd say only lend what you can afford to loose

DCFC79

I was always taught if i was lent money from parents to pay it back, hardly borrowe doff them anyway althoguh I do remember borrowing to buy the car a few years ago and no agreement was in place as we trusted each other.

jules888

Was the other way round with us.Husbands parents kept borrowing money off us and still owe us £100.Was always up to me to ask for it back as hubby too soft with them!

HappyMJ

jules888 wrote: »

Was the other way round with us.Husbands parents kept borrowing money off us and still owe us £100.Was always up to me to ask for it back as hubby too soft with them!

The other way around is more awkward as they paid for everything for 18+ years so a small gift when needed is just being grateful for bringing me up. Why are they borrowing such small amounts? Do they earn enough and need a little more to survive? Generally parents should have more free money than children due to the mortgage payments being a lower percentage of income etc etc... If my mother needed £100 to pay the bills I'd just give it her if I had free money myself (probably even if I didn't have the free money I'd find a way) and then I'd grab her bills and switch them to the cheapest supplier and get the cashback through Quidco/TCB. She wouldn't know how to do that so it depends on the type of person they are as to whether other people could do that.

owen_money

From my experiance with my kids 'lend' means have the money and never pay it back!

If I cant afford to lose it I dont lend it as I dont expect to see more than 50% of it again.

I agree 100% with assj on all points, it seems a bit tight to charge your kids interest.

Yorky1

Some more info:

The loans are for two different purposes:

Loan 1- €3300: For duplicate tuition fees after re-starting university a couple of times due to mistaken choices (course wise and partying..)

Loan 2-€700: Extra insurance premium to be insured on parents' car.

The motivation is the adult child is working three nights a week to pay back the loan and the work is taking it's tole - physically & mentally. If the parents offered a lower rate of interest the child could afford to work day shifts instead & perhaps have more of a social life.

The reason for charging interest is moreover to make it a 'real' loan rather than a gift - the child is aged 23.

orcocan

can you not do it informally? draft up something on a piece of paper with all the terms and schedule you've agreed and sign it both so that there can be no arguments or misunderstandings. From what you say it seems that your son is responsible enough to understand the situation and hopefully not to take advantage.

Also, when you're charging interest rates that are below inflation you're not really 'profiting' from your own children. I see nothing wrong with charging say 2% or whatever. He's lucky enough to have parents willing to lend him money, should learn nothing is for free...

(but whatever happens I wouldn't take my own son to court!)

bargainbetty

It's not making money from the 'child'. My mother loaned me money a few years ago for an unexpected property maintenance cost, and charged me interest equal to the sum she would have received in interest had it remained in the bank. She didn't make money, but I certainly didn't expect her to lose out. I had the option of a 0% purchase deal on a card, which would have cost approx the same amount in transfer fees as I paid her, so we kept the money in the family.

You can draft up an agreement detailing the sums to be loaned, the repayment schedule, interest costs etc, and have both parties sign it in front of a notary for extra protection.

If it goes wrong, you will have the written evidence of the loan, but you would have to take your offspring to court to enforce it. If you aren't willing to do that, then a written agreement with a civilian witness will suffice.

mrsb83_2

This is really a situation where sitting down with a solicitor would be beneficial.

I'm sure that you could get this done for around £250, which would be worth it for you to have all of the facts and options about enforcement and the tax implications.