3 essential things you really must know before paying someone’s debt

In its recent annual European Consumer Payment report, Intrum reveals that 43% of consumers believe that Covid will have a negative impact on their finances for at least another year. It also reveals that 22% of Europeans predict it will be two years or more before their financial well-being returns to normal.

If you know someone in this situation, you might be thinking of helping them out financially. One way you could do this is to pay off some, or all, of their debts. Even with low interest rates, servicing debt can become expensive and create a vicious financial circle some struggle to escape.

That said, care should be taken if you’re contemplating helping out. This is because there can be times when it may be the right thing to do, and times when it might not be.

Read on to discover three times you might want to consider paying someone’s debt off, and three times you really should be saying “sorry, no”.

When you might want to help out

When it’s an emergency

If you have a family member or friend who is in a one-off financial situation that you could help with, you may want to consider helping. For example, if they are about to have their home repossessed or have been unable to work due to illness such as long Covid, a lump sum might help them get back on their feet.

To help improve their credit score

If the individual has outstanding credit card bills, paying some or all of them off could boost their chances of getting a mortgage or loan in the future. This might be, for example, a grown-up child that you want to help become financially secure. If you do help them, be sure that they will not end up in more debt in the future.

If they have been a scam victim

If someone close to you has been tricked out of a substantial amount, it could put their financial security in jeopardy. A financial gift could help return them to where they were before they fell victim to criminals and provide a much-needed boost, both financially and emotionally.

Times you probably want to say no

When underlying financial issues are not being addressed

While a cash lump sum could help someone out, it might mean they don’t have to face up to irresponsible spending or other self-made financial problems. As such, they may come back for more in the future. Putting them in touch with a debt counsellor or financial planner might be a better solution.

There is some other underlying issue

If your friend or a family member has problem debt due to an addiction, for example, gambling or alcohol, you could unwittingly be making it worse by bailing them out financially. Instead, encouraging them to seek professional help to deal with the issue might be a better solution.

If it puts your financial security at risk

While you may want to help someone out of a difficult financial situation, you must ensure you don’t inadvertently put yourself into one. While you might be in a strong financial position now and feel you could help someone out, you may regret it in the future if you’re struggling to maintain your own lifestyle.

If you give a loan, make it official

If you feel that you can afford to give the money now but may need it in the future, you could consider providing a loan. If this is the case, be very careful, and ensure you create a legally binding agreement that will provide a legal comeback if the money is not repaid as agreed.

While it might feel awkward and could mean legal costs, it could prevent you from losing a lot more. It might also ensure you don’t have the stress and unhappiness of having to accept a lower standard of living because the money is never returned to you.

A financial planner can help

Before giving or lending money you need to consider your ability to meet your long-term financial needs. That includes the possibility of funding care in the future, maintaining your standard of living, and having enough money for emergencies.

A financial planner could confirm whether you can afford to give the money without putting yourself in financial jeopardy.

Get in touch

If you are considering gifting or loaning money to family or friends and would like to discuss whether it’s the right thing for you, please contact us. Simply email us at info@extinvestments.com, we’d be happy to talk.