Family Loans: How to Borrow From and Lend to Family

In Singapore, lending money to family members is a common occurrence. Opting for a loan between family members can be a low-cost option for home down payments, business startups, or repaying high-interest debts. It also offers quick cash during a job loss or emergencies.

However, mixing money and family is tricky. Defaulting risks the relationship and strains the lender's finances. Successful friends and family loans require clear communication and a written agreement. Whether borrowing or lending, understanding tax implications and creating a family loan agreement is essential.

If you are considering a loan between family members, here is a complete guide to navigating the complexities of family loans in Singapore. This guide will help you make informed decisions and establish a solid foundation for a successful family loan agreement.

A family loan, also referred to as a friendly loan, is applicable to friends, partners, or housemates. It involves agreed terms. Loans between family members can be interest-free or have an agreed interest rate, depending on the relationship and financial situation.

Repayment for personal loans to family members can be in instalments or a lump sum, offering more flexibility than traditional loans from banks or money lenders. Family loans may also be secured (backed by collateral) or unsecured. Collateral is an asset used as security, reducing the lender's risk.

The general benefits of lending money to a family include avoiding high-interest personal loans or fast cash loans and fewer approval barriers. However, personal loans to family members also have their downsides. This includes potential legal and tax considerations and strained relationships due to financial disagreements.

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It is essential to understand how friends and family loans are treated for tax purposes in Singapore. Singapore does not impose a gift tax, so interest-free family loans are generally not taxable, simplifying the process. However, if interest is charged, it is taxable income and needs to be declared to IRAS for legal compliance, ensuring transparency.

Unlike the U.S., Singapore lacks mandatory minimum interest rates, thereby granting flexibility in setting terms. For this reason, documentation is key; proper agreements distinguish loans from gifts, preventing legal or tax disputes especially when claiming income tax relief.

Nevertheless, this flexibility can be beneficial, but also requires careful consideration, as it places a higher onus on both parties to act responsibly, which we'll explore further in this article.

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It is essential to know the pros and cons before deciding to borrow money or to lend money because these decisions can significantly impact both financial stability and personal relationships.

Here are the advantages of loans between family members:

• Easier approval: No formal application, credit check, or income verification is required, unlike bank or licensed moneylender loans in Singapore.

• Lower costs: Family loans often have little to no interest, avoiding high bank rates, processing fees, origination fees, and late charges.

• Flexible repayment terms: Family lenders may allow deferment or adjustments in case of financial difficulties, such as job loss or illness.

• Avoids high-interest loans: Helps borrowers steer clear of licensed moneylenders and credit card debt, which may have high interest rates.

Here are the potential disadvantages of loaning money to family members:

• Risk of strained relationships: As mentioned earlier, unpaid loans or unclear terms can create tension between family members.

• Tax considerations: If interest is charged, it may be considered taxable income under IRAS regulations.

• No credit score improvement: Unlike bank loans, family loan repayments are not reported to Singapore’s credit bureaus (CBS), so they do not help build a credit history for future borrowing.

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When lending money to family or friends, formalising the loan is extremely crucial. While this may seem cold or calculative, this process will help avoid issues during repayment. Essentially, a family loan agreement is a contract detailing loan terms. A notarised, signed agreement, then, can prevent misunderstandings and frustrations. Include loan amount, purpose, repayment schedule, interest rate, early repayment terms, and default clauses.

• Loan amount and purpose

• Repayment schedule and frequency

• Interest rate (if any)

• Early repayment terms

• Default and emergency clauses

Be sure to include both parties in the decision-making process for transparency and fairness. To that end, borrowers need to be clear on the loan purpose and repayment plan to ensure they can meet their obligations. Similarly, lenders should assess affordability and discuss potential risks upfront, being honest about their financial capacity. Ultimately, open communication benefits both parties in a friendly loan. 

Furthermore, it might be helpful to consider including a clause for mediation or arbitration in case of disputes, ensuring a neutral third party can help resolve disagreements. This proactive approach strengthens the agreement and safeguards the relationship, even when financial matters become complex.

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When thinking about a friendly loan, also consider alternatives that may provide more cash and less risk to your relationships. After all, there are many other options in Singapore, each with its own benefits and drawbacks.

>> MORE: Best smart payday loan alternatives: fast cash without the debt trap

Here are alternatives to friendly loans in Singapore:

Personal loans: Banks, financial institutions, and licensed moneylenders offer structured repayment plans with interest rates based on creditworthiness. These loans offer a range of loan types and repayment options, including those for education, vehicles, consolidating debt or home improvements, with clear terms and legal protections.

Given the plethora of options, it's essential to shop around to find a loan with repayment terms you can realistically afford. In general, interest rates for personal loans in Singapore range from approximately 3.88% to 10% EIR (Effective Interest Rate), though this can vary significantly based on your creditworthiness and the lender's terms. That’s why you need to be realistic about your financial capacity and plan your repayment strategy properly to avoid future financial strain and protect your CBS score.

>> MORE: Best loans for bad credit in Singapore

Co-signed or joint loans: Adding a family member as a co-signer or guarantor can improve approval chances but carries credit risk for both parties. Doing so can increase your chances of qualifying and put less pressure on your loved one since they’re not providing the cash.

Nevertheless, there’s still a risk of damaging your relationship. Specifically, failure to repay a co-signed loan can hurt both of your credit scores. Also, a co-signer must repay the loan if the borrower can’t, adding stress and tension to the relationship.

Cash advance services: In Singapore, some financial platforms and salary advance services allow short-term borrowing with fixed fees instead of high interest. This works by providing a portion of your upcoming salary, which you repay on your next payday, making it a good alternative for urgent needs without long-term debt.

Buy now, pay later (BNPL): If you are taking a friendly loan to make a purchase, then this is a very good alternative. BNPL is available at retailers for splitting large purchases into smaller payments, but requires disciplined repayment to avoid late fees and potential debt accumulation.

Gifting: If affordability allows, gifting money instead of loaning can help avoid financial strain and relationship conflicts. Indeed, good relationships are important, and gifting may be the best way to keep these intact, as it removes the burden of repayment. However, this is only an option if it does not put a financial strain on the gifter.

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