Taking Private Loan from Family: Is it Beneficial

There are many misconceptions about borrowing privately. And that is a shame, because borrowing from family or friends is becoming increasingly popular. Especially now that the banks apply stricter rules and you can finance up to 101% of your new home. As a result, you have to bring more money for a new home and sometimes look for alternative financing options. Substantial lending then seems the cheapest option, but is that the case for Private loan lenders Singapore companies?

Private loan parents

Most private loans are taken out between parents and children. Parents benefit from interest income – which is currently higher than savings rates – and children can borrow cheaper, right? Unfortunately, that is not the case. You also have to pay a market-based interest rate for a private loan. If you do not do this, the tax authorities will see the interest as a gift from your parents. In that case you pay between 10% and 40% gift tax and you are a lot more expensive than with a normal loan. Especially now that the loan rate is historically low.

Private loan

You can also borrow money through crowd funding or friends. The same applies here to borrowing money from a family: the lender actually benefits from higher interest income, but you are not necessarily cheaper than with a normal loan. In addition, a private loan can put your friendship under pressure. The mutual financial obligations change your friendship a bit in a business relationship. So think before you start and always check out the loan offer from different banks.

Private loan and the tax authorities

You always pay a market-based interest for your private loan. Are you using the private loan to buy a house and do you want to benefit from mortgage interest relief? In that case, you must also repay the loan within 30 years, just like a loan from the bank. Only then are you entitled to interest deduction. In this case, you must also have the loan recorded in a notaries deed.

Donate or borrow privately?

Do your parents want to help you with the purchase of your new home, but would you rather not take out a private loan? Then your parents can consider a tax-free gift. Friends or other individuals can also do this. Another option is that your parents buy a second home for their child and you rent this house from your parents.

Borrow money from private individuals or from the bank?

If you have a choice and you can just borrow from the bank, financial experts recommend doing this. The interest rate is currently so low, there is no private against it. Moreover, you keep your friendship or family relationship separate from your money matters. Good friendships and a warm family, that is priceless.

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