Helping your son or daughter with debt or a house deposit

It’s natural to want to help your children if they are in difficulty. But if your son or daughter has debts, can you afford to help them?

And is paying their debts or giving them a loan the best thing to do, or are there better alternatives?

I’ve written before about whether someone should help their parents with a debt problem – but helping your children has different implications, both financial and emotional.

Are you financially secure?

This is the first thing to consider:

• are you ok for money now?
• will you be when you are retired?

If the answer to either of these questions is No, then you shouldn’t give or lend your children any money whatever their debt problems.

By “secure”, I mean that your own debts are either paid off now or are well on the way. This includes your own mortgage – the current low mortgage rates won’t last forever and an interest-only mortgage needs a plan to get it repaid!

You also need adequate pension provisions or other savings for when you retire. You can’t assume that if you help your children now with money, they will help you later when you are retired. Illness, divorce or job problems may make this impractical.

There are other ways of tackling their debts apart from using your money (see below). They are younger than you and they have more time to rebuild their own finances.

But if you get into money difficulty in a few years, no-one is going to lend you money when you are retired.

Be very wary of taking money from your pension

In “Should you use your pension to pay off debts?” I looked at using your pension to clear your own debt. But it’s worth reading as many of the points about tax, charges and the possibility of you running out of money in your retirement are equally important here.

There is also the additional problem if you are giving the money to your children (including paying their debts) that if you are getting any benefits now, or might be in a few years, then you are likely to be seen as “having deprived yourself of capital”.

Suppose you had £20,000 in your pension pot and you thought “I would only get a tiny annuity, I would rather give it to my daughter who has big money problems”. If you are claiming housing benefit to help with the rent, then your local council is likely to decide that you shouldn’t have given your money away so you won’t get ANY housing benefit.

Are they getting all the benefits they should?

If your son or daughter is struggling because of a big change in their life – redundancy, ill-health, separation – they should see if there is anything they are entitled to that they aren’t claiming.

They can use a good benefit calculator or visit their local Citizens Advice.

How bad is the debt problem?

Even if you clearly have enough spare money to be able to help, you need to know the true extent of their debt problem. That means a complete list of their debts and what looks like a realistic budget.

If your son says that £5,000 will be enough you might be happy to write that cheque.

But he may just mean that £5,000 will pay off his most urgent debts, then there may be another £10,000 more…

He may not even have added up the debt total himself – he may be trying to ignore debt problems piling up, especially if he is depressed. You could suggest he looks at his credit records to check he hasn’t missed any off.

It’s difficult giving money advice as a parent

I’ve looked here at how to help a friend with debts. This won’t be easier because it’s your child rather than a friend – the additional emotions and expectations can make it harder to take sensible decisions. If you currently have a good “adult” relationship with your son, both of you may be unhappy if money concerns result in this turning into a controlling adult – cajoling child situation.

Also you don’t want a discussion about money to end up sounding like the Monty Python sketch – Cardboard box? You were lucky, we were so poor….  It can be easier for an impartial debt adviser to point out that they can’t really afford takeaways three times a week, Sky and all the i-gadgets without it seeming like personal criticism.

You could just suggest tools that can help, rather than to actually tell them what they should be cutting down on, for example this financial checklist for new graduates or one of the new apps that make it easier to save.

Where did the money go?

But even though it’s hard, if you do intend to give or lend a child money, you need to be sure exactly why the money problems have arisen.

Sometimes the cause of a debt problem is obvious, perhaps your daughter’s ex left her with maxed-out credit cards.  But it could just be a combination of a not great income, trying to keep up with friends who earn more and no real focus on how to budget. If she has always had a problem with money then this is a warning signal.

By paying her debts now, will she go on to run more up debts?

This is especially likely if paying her debts will leave her with a good credit record. Will you be able to afford to bail her out again in a few years? Is she going to assume that you can?

Sometimes running out of money and having a damaged credit record can be the only things that make someone decide to manage money differently.

If it looks as though they should have had plenty of money, you do need to know where it went. The NHS reckons 2 million people have an addiction problem… and most of them have financial problems as a result. Giving money to someone with a gambling problem is not helpful, however desperate they are.

What about student loans?

Just forget about them. It’s annoying that our children are saddled with such large debts and you may feel guilty if you went to university when there were no fees, but the interest rates are low and they won’t have to repay them if their income falls. As debts go, these are about the most harmless – unless your own financial future is looking brilliant (mortgage repaid, both of you have excellent private pension arrangements) you shouldn’t consider this.

Should you act as a guarantor?

You shouldn’t agree to act as a guarantor unless you are really sure that you could manage the debt or rent commitments if you had to.

Amigo and other guarantor loans such as those from Bamboo, Buddy Loans, UK Credit are particularly difficult. The interest rate on these loans is horrible – often around 50% – and so it is much more likely that your child will find the repayments hard to manage. The lenders are very quick to come after you as the guarantor, regardless of your own circumstances.

Amigo has admitted that 30% of guarantors have to make payments to one of their guarantor Amigo loans.

Guarantor loans are basically a very bad idea. If you could afford the repayments if you had to, then it would be better for you to offer your child a loan at a low or no interest – this still means you are taking on the risk, but it’s much more manageable without an extortionate amount of interest being piled on top.

What about a deposit for a house?

This is increasingly common.

This is in a rather different category – you aren’t helping them with debts – but the same worries about your own financial future apply.

In particular, if you still have a mortgage of your own, giving your children a large amount makes it harder to clear your own mortgage before you retire. And taking the money from your pension may leave you in a difficult position later.

What are their other debt options?

The more you can encourage them to research their options the better, so that they feel more in control and less as though you are telling them what to do. Explaining that you will support their choice whatever it is can really be helpful.

There is a simple guide here to the main debt options. A Debt Management Plan is often a good first move, buying some time with creditors and giving your son or daughter a breathing space to see if they can improve their finances.

If they need to move, you may be needed to help with the moving costs, deposit to rent somewhere, or act as guarantor.

If their situation is so impossible they need a clean start, then they should look at a Debt Relief Order or even bankruptcy – in this case you can offer to help with the fees. These can be much better uses of your money than paying off some of your son or daughter’s debts and then watching as their debts increase again.

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