If you have grown-up kids, you may be keen to help out by loaning them the money they need. But if you don’t have the cash readily available yourself and will have to borrow yourself to do this, there’s a few things you should consider beforehand.
It doesn’t matter whether you plan to give the money you’ve borrowed away as a gift or make arrangements for the money to be repaid. If you’ve taken out the loan in your name, you’re legally responsible for paying every penny of it back.
"The lender will expect you to keep up with your repayments each month."
When you sign a credit agreement, you agree to make all of your repayments until the money you’ borrowed has been paid back to the lender. Don’t forget, you’ll most likely be charged interest too, so you’ll ultimately pay back more than you borrowed.
This means that the lender will expect you to keep up with your repayments each month. If you find you start to struggle to cover these payments, it’s your credit history that will be affected – not the person you lend the money to.
Each line of credit you take out is recorded on your credit history along with how well you’ve managed your repayments. So, if you’re late making or miss any payments, this will leave a footprint on your credit history that is visible for future lenders to see.
You should bear this in mind when considering borrowing money to give to someone else, especially if you’ve plans to apply for credit yourself in the near future. If you wish to take out a loan for a new car or home improvements, but have struggled to repay the loan you took out for your child’s house deposit, this can affect whether your own application is approved.
Perhaps more importantly, if you plan to take out a secured loan, be certain you can manage the repayments even if you don’t receive a penny from your child. A secured loan is secured to your home – and if you don’t pay, the roof over your head is at risk.
What’s the agreement?
When you apply for a loan, the lender is likely to ask what you need the money for. It’s important you’re truthful about your reason for taking out the loan, as lying on your application can be classed as fraud.
Aside from this, when your child applies for a mortgage, lenders will ask where the money for the deposit has come from. Some lenders ask that the cash for the deposit is declared as a gift if it was provided by a friend or family member. This means it does not have to be paid back. Other lenders may not accept cash gifts from family and friends. It will ultimately depend on the mortgage provider and their own rules.
If you and your child agree that they will repay the money, you should make sure a repayment agreement is put in place to make things clear. You could arrange for them to make a monthly repayment to you ahead of the date your repayment to the lender goes out, so you don’t miss it.
Another thing to bear in mind is that your child’s financial circumstances could change in the future. If they start to struggle to pay you back, will you still be able to make your repayments? This could add pressure to your relationship, not to mention put you in a difficult financial situation.
So, as we’ve established, there’re risks you need to be aware of before you agree to take out a loan on behalf of the first-time buyer in your family. If you miss a repayment, you run the risk of your credit history being affected, the lender taking legal action against you and your home being repossessed.
Always weigh up your options and have a clear budget in mind if you plan to borrow money.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.