The economy in the Netherlands is improving again, although I notice little or nothing in my wallet! You do? According to the media, we consume again as if our lives depended on it. Banks are less reluctant to lend money, but of course as a borrower you have to meet a laundry list of criteria. Interest-only mortgages are a thing of the past and unlike in the past, you usually need a small starting capital to be able to buy your first home. Nobody is waiting for a new banking crisis and so things are a bit more difficult than 10 to 12 years ago. Interest is on the very low side. That then again!
For example, you currently have a personal loan at an interest rate of approximately 5.6%. Depending on which form you choose and depending on the term, you can already take out a mortgage loan at approximately 1.63%. If you plan to borrow money, it pays off in the current market to shop around before you place a signature and get the money deposited into your bank account.
Low interest rates, a good economy, numerous offers from banks, it's all great, but are you also eligible for a loan? Or can you take out a Lewis Carl but not enough to finance your first home? These are issues that young people in particular regularly encounter. Also not very strange when we look at the rising prices of homes. Especially in the big cities it is more the rule than the exception that houses are sold above the asking price. In such cases, among others, it is nice when parents, other family members or even friends can help you financially.
Borrow money from the parents
Have you also pulled your parents' jacket to finance your first home? Or did one of your children pull your coat? With young people who are going to buy their first home, we increasingly see that parents sometimes have to help out with substantial amounts. Thanks to that help, the son or daughter can still arrange the financing.
Parents can donate the amount to their child or lend it to them. A tax-free gift from parents to their children is limited to 5,363 per child, per year. To be fair, that will not always be enough when buying a house. On donations in excess of 5,363 US dollar, a son or daughter will have to pay 10% to the tax authorities.
When the parents donate more than 123,248 US dollar, the children even pay 20% gift tax on the amount above 123,248 US dollar. So donating is not always the most advantageous form of aid unless you like to fund the treasury. Parents can also lend a sum of money to their children. This can be arranged through a bank or mutually. The big advantage is that the interest for the son or daughter is deductible and that the parents can give back a large part of the annual interest via a donation. As a result, a combination of lending and donating is usually the most advantageous solution.
Be guided in this process by a notary (not mandatory) so that the tax authorities can never question your agreement! When parents are wealthy enough, they could also buy a house and rent the house to their child. It is important to know that any mortgage interest is then not deductible. It is equally important to know that the child who lives in the house can simply apply for housing benefit. Depending on the living situation, the housing allowance can amount to 354 US dollars per month. The house can then be inherited later.
Borrow money quickly?
Perhaps you have experienced it, at least I did: sometimes you need a quick financial injection. Despite the fact that mainly the providers of personal loans and revolving credit offer a quick handling (or rejection), borrowing money without a bank is often the fastest. Borrowing money from a private person is simply more personal. You often know each other's situation, you have a certain form of mutual trust and there is a lot less paperwork involved. In some situations, borrowing money quickly is also necessary to prevent further problems.
The bailiff is waiting for it, that rare oldtimer is finally for sale somewhere, or your washing machine and refrigerator fail at the same time. Borrowing money from a private individual is therefore easier and faster to arrange. Applying for a loan from the bank can quickly take a few weeks. Faster and easier does not automatically mean that it is better! You will not be the first to be influenced too quickly by a so-called clear and very positive sounding explanation from a lender or intermediary.
These kinds of conversations run very differently between family and friends. You usually know how much money you need and the other usually knows whether he or she can and will lend it. We often agree on an interest-free loan or one with a low interest rate. Who would want to make a difference to family members or friends? However? Regardless of whether you borrow from a private individual or a bank: weigh all important matters carefully and take at least one to two days to come to a good decision. Everyone hates it, but still read the fine print of a draft credit agreement with a bank.
Look before you leap!
Don't be too quick to lend or lend to family or friends. Especially with a large amount of money, it certainly does not hurt to put the agreements on paper or even to record it notarized. Even with smaller amounts, you must be aware of each other's obligations and expectations. Don't get me wrong, mutual financial help usually runs smoothly, but quite a few family ties and friendly relationships have also been destroyed by the mire of the earth: the money! Make clear and realistic agreements.
Make sure you know what you expect from each other and that the expectations are achievable for both parties. Borrowing money from a private person versus applying for a loan from a bank weighs very well. An argument over whether or not a debt is repaid can be disastrous for all kinds of relationships, even when it comes to family. Fortunately, I know many great stories about parents who help their children buy their first home, pay off a student loan or buy a car. In general, it is nice when you can help each other financially. It is simply a matter of making good agreements and, above all, not tackling too quickly. So look before you leap!
The secret of the blacksmith ...
First check whether you are eligible for a loan from a regular lender. Who doesn't dare who doesn't win is my motto! If you are eligible and meet all kinds of sometimes crazy criteria, do not take out the credit immediately! Take the information home, read the calculations carefully and see if you can bear the monthly costs. It is wise to insert a cooling-off period of at least 2 to 5 days. Feel free to go back to the bank if you have any questions. If you've already started a conversation with a family member or friend, discuss the credit institution's offer.
Have you also 'shopped around'? If there is one bank that is willing to lend you money, chances are that several banks are willing to do so. Applying for a loan is often an emotional barrier. The fear that your application will not be accepted is actually unnecessary. A credit institution is happy with anyone who makes an attempt. If you prove creditworthy, take a good look at the requested interest, the term and whether you can bear the monthly costs. Compare these matters with the agreement you would like to enter into with the private person in question.
When it turns out that the differences are minimal, it is probably a better idea to borrow your money from a bank. So the real secrets of the blacksmith are to inform yourself well, to compare and to make the right decision. Don't be afraid to step into a bank and especially don't be afraid of rejection. No you already have, yes you might get it!
What can go wrong when borrowing money? Well, a lot… For example, you may not be able to meet your monthly repayment and payment. Banks are quite strict about this. Within a few days, a letter will hit your doormat, which will probably make you sleep badly for two or more nights. Sometimes that letter is followed up by a phone call from your bank with possibly an invitation at the branch.
Fortunately, there is often a sleeve to adjust. This will be a lot more informal when borrowing from family members or friends. The big question, however, is whether this person has the financial ability to grant you an extension or to find another solution. The last thing you want is for two people to suddenly sleep badly. When you lend money, you have to be very aware of any setbacks. Can you catch it? Well then there is no problem and you can look for a solution together.
As a lender, can you not miss a missing monthly payment? Then it might be better not to offer your friends or family members a loan and just say 'no'. Although that seems easier than it is! The borrower may also experience unexpected changes in his or her life, causing him or her to no longer be able to fulfill the agreements at all and also to be unable to repay the debt. A bank would seize and possibly sell the movable and immovable property of the borrower.
This is a daily routine for a bank. However, this is very different for private persons. You don't really want to sue family members or friends. Should this nevertheless turn out to be the case, the costs of the legal process are often extremely high. Unlike a bank, an individual cannot usually afford to lose a large sum of money. Doomsday scenarios like this often lead to a worse relationship between family members and countless friendships have already come to an abrupt end because of money matters. Borrowing money privately therefore entails social and emotional risks in addition to the normal risks. Note: this is more the exception than the rule, so do not hesitate to ask for the help of a family member or friend.
It can also be done differently
Fortunately, the above scenarios are not how it works in most cases. Usually, lending money to each other goes fine! Especially when you know each other well and are familiar with each other's financial situation. Family and friends will not easily lose each other, not even financially. The expectations, the financial picture, the monthly amounts and so on should simply be simple and clear to everyone. For example, I have a 99-year-old aunt who is a widow. Through a lifetime of hard work and entrepreneurship, she is quite 'warm'.
It will not surprise you that people regularly turn to for some financial help. She is still sharp-minded and I find it admirable how she always knows exactly what is possible and what is not possible. My aunt isn't afraid to say 'no sorry' either. For example, she never lends out amounts that she could not afford to lose if it appears that the other person is ultimately unable to repay the amount. "It shouldn't make you eat less and it shouldn't make you heartache," she once told me when I asked her if she wasn't going crazy about begging and nagging about money.
My aunt is a smart aunt that I hope will learn a lot from! Perhaps the most important criterion when you lend money to someone else: it should not harm you too much when there is a (temporary) hitch. Actually, the size of the amount should not have too much of an impact on your own life if you will never see the money back. Your feelings are a completely different risk than can never be fully hedged. I know from experience that you feel betrayed when you lend money and you see neither the person nor the money after some time! Personally, I have especially good experience with lending or lending to family or friends
My personal experiences
As a student I was very happy with the sometimes substantial donations and loans that my parents provided me. If necessary, I had to obtain my MBA from a renowned and at the time still private university. Cost: Converted about 10,000 US dollars per year with a study plan of three years. It doesn't seem as bad as it was, but since I am already 'middle aged' and played this in the early nineties, this was a huge amount of money for that time.
My parents were neither rich nor poor, but for them it was a lot of money. The fact that they had three children didn't make it any easier. They decided to take out a second and later even a third Lewis Carl. We did not put anything on paper at the time. In fact, I suspect my parents saw it as their duty to provide their children with a study of their choice regardless of the cost. I don't know if I would feel the same way and since I don't have children, it remains a guess.
Apparently my parents didn't see it as a loan, but I felt quite safe and saw it as a loan. When I was able to get started with what I thought was a world job after university, I spontaneously started giving my parents money every month. Sometimes 1000 guilders (yes there were then!) Sometimes 500 guilders or less. Outrageously I never kept a list and to this day I have no idea if I refunded everything. Not once have they asked for a repayment, never have they mentioned a loan. I think it has been like this in many families and maybe still is. Many years later I could be proud of a good, stable career which I owed to my parents. Soon my husband and I realized that the cliché of two career-minded, childless gays was more reality than cliché.
As a result, family and friends sometimes asked us for a loan. We have gradually become wise about this through damage and shame. For us, we are happy to help if we can. When it comes to smaller amounts, we discuss it among ourselves. No paperwork, no nonsense. If the amounts exceed 5000, we draw up a note with the amount due and the agreements made. Have we ever 'turned our face'? Hell yes! That is why, from experience, I also recommend that you only lend out amounts that you could miss if things go wrong. In general, I have mostly positive experiences with lending money to family or friends. I want to have good faith in people and that certainly applies to my loved ones. With a few exceptions, it is a nice feeling to be able to help people. Especially when you do this carefully, they are even very positive experiences. In my view, shared problems (financial or otherwise) bring people closer together.
In short ...
Borrowing money remains difficult. The right decision depends on gathering a lot of information. Consider whether the bank, your parents, friends or family members are the right place. This is very different for everyone and in every situation. Borrowing can cost money, but perhaps worse: it can also damage relationships enormously. Sometimes you can't help but borrow money without a bank. Make sure you are open about what you can miss every month. Don't make promises you can't keep. Also calculate carefully how much money you think you have to borrow. Harassing someone a second time is not convenient and certainly does not contribute to confidence.
So immediately ask for the correct amount. On the other hand, you should not be tempted to 'special' lenders who charge crazy high interest rates to so-called 'risky borrowers'. If for whatever reason you cannot go to a regular bank, it is absolutely no shame to enlist the help of a family member or friend! In fact, if your parents are somewhat wealthy and you have a good relationship with each other, it sometimes makes more sense to borrow money from them than to go to the bank. When borrowing money for a house, it is important that you compare all options together with (usually) your parents.
Choose the solution that is most beneficial for both parties. Also ensure that a mutually agreed loan is recorded in writing. The tax authorities can request this agreement. If your scheme does not fall within the law, or if there is any doubt about this, the tax authorities can and may stop any mortgage interest deduction and claim it retroactively. If parents and child do not have too much knowledge, it is advisable to consult a good notary.
If the lenders want a mortgage right on the house, you have to go to a notary anyway. Be clear to each other about what you expect from each other. Also discuss possible doom scenarios and how you will solve it when there is a (temporarily) difficult situation, for example when you are fired or when you switch to another job. If both parties have considered everything carefully and have been open and honest with each other, the average credit agreement between family or friend is often a better one than the one with any bank!