Soft Loans for Your Children
Posted On: 31/10/17 - 0

Soft Loans For Your Children

What Is A Soft Loan?

A soft loan is a loan with a lower rate of interest versus the current bank rates. Sometimes soft loans provide other perks or benefits to borrowers. Those could include longer repayment periods, or interest free loans. Soft loans are usually made to adult children by their parents, or the government lending to a worthwhile project. In this article, we are going to talk about soft loans for your children.

Types Of Soft Loan Arrangements

Parents often make loans to their adult children to help them with big purchases.  This could include higher education, a new home, or a car are just some of the examples. In this case, this type of loan is different from a gift. The parent may decide to charge interest so that the loan will earn the parent some investment income. The loan can be set up for both  payments of principal and interest or to pay interest only.  This is all designed and agreed upon by both parties. There is no requirement for the parent to even charge their kids interest.

What Happens If The Loan Is Never Repaid?

A long term loan for example, to purchase a personal residence, for example, it is very possible that the loan will not be repaid during the parent’s lifetime. The parent could indicate in their will that any remaining balance of the loan will be forgiven or instead become part of the child’s inheritance. This type of agreement does not cause any adverse tax consequences because the “debt forgiveness” rules in the Income Tax Act do not apply to the settlement of loans by inheritance or bequest.

Gifting your child this kind of loan is similar to giving them a part of their inheritance early, during your lifetime.

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