Generosity Can Backfire

Parents need to make it clear whether any handout is a loan or a gift

- Susan Hely

Australians are generous when it comes to lending money. A recent study by RMIT University found that Australians hand out $1.65 billion a year in informal and unprotected loans to their family and friends.

But too often you hear about loans going wrong. Misunderstandings about whether it is a gift or a loan are common. Adult children sometimes pressure their ageing parents – some already with dementia – to lend them money that they promise they will pay back. Fights over loans can often tear families apart.

For this reason, before you hand over any money to your family, no matter how much you trust your relatives, think it over carefully. There is a huge risk that you won’t be repaid.

While some parents don’t count on being repaid by their kids and view the loan as an early inheritance, it is more common for them to make sacrifices to lend them money and count on it coming back. Also parents may end up needing the money for their own needs after all – in the event of a health crisis, accident or aged care – so it is always best to consider it as a loan, rather than a gift.