Lending money to family members

Should you lend money to friends or family? Private loans between family members and friends are a convenient, flexible and cheap alternative to using commercial loan organisations such as banks or pay-day lenders. How to loan family money? Many people in need of a loan will first approach relatives or friends who appear to have money to spare, especially if the borrower does not have a good credit history, or is just starting out financially.

Giving money is invariably better.

It is less complicated and may have tax advantages. Realistically, however, for many lending may be the only option. Whatever you decide, make sure the terms of the gift or loan are clear. Distasteful as it may seem within a family , putting everything down in writing is not just sensible, it’s vital.

Borrowing from a family member can provide emergency money and help you avoid forms of borrowing with very high-interest rates, such as payday loans and doorstep lending. The key to lending money to family members —especially if you expect the money to be repaid—is to treat the deal as a business loan and keep all your emotions out of it. Few people ever bother with a written legal agreement, and even fewer ask for interest to be paid on the loan.

Talking about money with family members can be awkwar especially if you’re in a position to lend.

But glossing over the details can possibly hurt you both. Make sure that you clarify the amount being loane the interest rate, the repayment schedule, and late fees well in advance of any money changing hands. Immediately getting the terms out in the open reduces the possibility of any.

Lending money to a family member—or borrowing from one—might sound like a good idea: The borrower gets easy approval, and any interest stays in the family instead of going to a bank. In many cases, family loans are successful—but success requires a lot of open conversation and planning. Lending money to friend or family is only a good idea if you can afford it and you know you will get your money back. You may just want to help someone you care about avoid high interest charges when loaning from a bank. But you have to put your financial.

Family Loan Agreement is a legal binding agreement between two family members that clearly spells out the terms of lending money to a family member with an aim or being paid back after a given duration of time with an accrued interest. This agreement can also apply to lending money to close friends with an aim of getting back your money with an interest after a certain duration of time. Bill Bischoff Comments. The right ways and wrong ways to share your cash with your kin There are tax. When lending money to family members , you are not only doing them a favor, you are also making an investment.

That is, you will make money on the funds you loan. Just as the IRS requires that you use a reasonable interest rate, they also require that you declare any money you earn on a loan in your income taxes. Keep in mind that you are entitled to “gift” another individual up to $1000.

If you could invest the money that you lent to friends and family members , even through peer-to-peer lending networks like Lending Club and Prosper, you could have received interest.

Pro Tip : Charging your friends or family members interest on loans might seem awkwar but it isn’t unreasonable. Figures suggest that the economic downturn has resulted in ever more loans being made between friends and family members. You want to loan money to a cash-strapped family member? That’s a nice sentiment, but please take my advice and make the loan the tax-smart way.

If your family member finds themselves in need of extra money due to poor spending habits or lack of savings, this can be an opportunity to teach them about being more responsible with money. You can set boundaries around the money you len such as when it needs to be paid back by, and even charge interest. This note provides an overview of the issues those considering entering into such arrangements need to take into account. Lending money to a friend or family member to help out in a time of need will no doubt win their gratitude in the short term, but it can also cause rifts that last forever.

The Golden Rule when lending money to family or friends is “always have a signed and dated written loan agreement”. The family member that is asking for the money may be required to pay an interest rate, defined as a percent compounded annually, by the lending party. If so, the lender will be paid back more money than what was originally lent to the borrower. Although, usually funds loaned between family members are not charged an interest rate but depends on the family relationship. If you need some convincing, here are six reasons why lending money to friends or family is a bad idea.

You’re a last resort They’re likely coming to you because they can’t get a loan.