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Loaning Money to Family
28 Jul 2019

Your Ultimate Guide to Loaning Money to Family

You are most likely to get back 57% of the money you loan to relatives!

Loaning money to family and friends can have adverse implications on your relationship. How do you say no when a loved one is in a fix? If someone has bad credit and cannot take out a loan to pay credit card debt, their only solution becomes a family member.

When it comes to such loans, the binding agreement should be formal. Setting terms and a repayment schedule is a smart way to ensure that you get your money back. However, you should be ready for defaulting despite the existence of a formal agreement. Family loans are no different to any other type of loan like installment loans.

Tips for Loaning Money to Family and Friends

When a family member approaches you with an urgent financial issue, you are likely to loan them without a second thought. However, not everyone has the etiquette of borrowing money.

As you offer financial assistance, these considerations can help you when loaning money to family.

1. Have a Loan Agreement

When you agree to loan your friend or any family member, create an agreement. The contract with family members or friends is simpler than the bank. Yet, it plays a crucial role when a disagreement ensues.

In the loan agreement, you should indicate the principal, repayment terms and interests where applicable. The contract should clarify the course of action in case of non-payment. Some of the recourses that can be on the agreement include taking legal action or ownership of the collateral.

Loaning large sums of money might require witnesses. Borrowers are likely to honor loan repayment especially when the witness is a senior family member.

2. Write It Down

People tend to simplify loans to family members, which should not be the case. When loaning any amount of money, don’t feel intimidated to note down the terms. Breaching a verbal agreement is easy because one can forge forgetfulness.

To avoid future misunderstandings, have a well-written agreement where the involved parties sign. It can protect you and if you decide to go to court, the written agreement is a sufficient ironclad.

Each party can have a copy of the written contract for future reference. Save a soft copy of the agreement because you might misplace a write-up before the repayment period is over.

3. Use Cash

You should never give in to requests from your loved ones to open a credit card even when they are in a dire financial need. Your ability to secure a loan in future is in jeopardy if your sibling has a credit card in your name.

If you are not in a position to loan a family member or friend using cash, just decline. When using cash, lending will have minimal impacts on your future credit score. Financial help to your loved ones should not limit your future financial activities.

Co-signing a loan for a sibling or friend should not be an option. Defaulting on such a loan will affect you extensively. Failure of the borrower to repay the loan means that you automatically become liable.

You should understand the financial and legal implications as a co-signer.

4. Lend What You Can Afford to Lose

Lending money to a friend or family member is a gamble. If the money your friend needs can break your relationship if unpaid, then decline. The money you give out to a loved one should be an amount you can comfortably afford.

A family member might be intending to repay the loan but lack the resources. In such instances, you may be forced to write off the loan, be understanding, and maintain the relationship.

It is important to discuss with the borrower your concerns. You can agree on the collection plans and the course of action when they default.

5. Charge Interest

Charging interest might seem unfair when loaning a friend or a family member. Yet, interest is one of the ways that you can protect your hard-earned cash. A fair interest prompts your loved one to pay the loan on time.

Loaning money to a friend or family member has tax implications, which is in the form of a gift tax. Charging interest is one of the ways to avoid the gift tax. However, it is important to research on ways you can protect yourself when loaning a family member.

6. Review the Finances of the Borrower

Based on the relationship you have with the borrower, it is beneficial to review their finances and act accordingly. Most of the young people within the family might need a loan to finance less important issues. Helping the borrower to budget and use money wisely will improve their financial management skills.

While you want to be that reliable friend or sister, you should make inquiries on the usage of the loan. Some needs might not be worth your money. A borrower who tries to be overly defensive is already a sign that you might never recover the loan.

7. Maintain Your Distance

You might be tempted to investigate how your loved one uses the money you have loaned out. Micromanaging a loan can be an irritant to the borrower. When you loan the money, distance yourself and allow them to plan the money according to their needs.

Instead of focusing on the already loaned money, concentrate on the repayment plan. Being the lender does not allow you to be intrusive. Such a move would create a rift between you and the borrower.

In some instances, keeping the distance is hard especially when the borrower is your younger sister or brother. Instead of giving him/her the money, you can pay directly to get the service or product they need. The strategy ensures that the money you loan out remains useful for the intended purpose.

8. Understand the Tax Implication

As a lender, the tax implications of a family loan are likely to burden you as opposed to the borrower. You have to prove to the IRS that the money you have given a family member is a loan. In this case, you have to adhere to the federal rate on interest.

Without the interest, the loan is treated like a gift, making it taxable. Legal documents are also a requirement when it comes to family loans. The parties involved need a promissory note to outline the terms and conditions of the agreement.

9. Give a Cash Gift

A financial gift will save you from relationships turmoil that is common when you loan a family member or a friend. The cash can be ideal when someone is experiencing short-term issues. You can give out the cash based on what you can afford.

The recipient should know that the money you give is not repayable. The arrangement prevents the awkward feelings common when asking for a loan.

Non-cash gifts can also be beneficial when you are aware of the specific need of the borrower. A gift card is one of the ways to help a family member who is in a fix without risking your money. Through such a form of assistance, you can know how the family member uses such an amount.

How to Maintain the Relationship with Friends and Family after Lending Money

When a family member or friend loans you money, it is important to remain faithful and repay. Breaking a loan agreement can make strong relationships to collapse.

When you are unable to fulfill your part of the bargain in loan repayment, communicate on time. Informing the lender when you encounter hitches prevent animosity. You don’t have to communicate how you spend the money; the repayment plan is what interests the lender.

The written agreement when loaning family members or friends promotes verbal understanding. Parties might forget the terms and conditions a year after receiving the loan. The write up prevents any form of chaos and preserves the relationship.

Consider directing your friends or family members to other options when they need an emergency loan. While you want to help, overdependence can strain your relationship with people. There are several credit facilities that can loan money at a small interest.

Learn to say no when the conditions don’t favor you. Chances are you will have a strained relationship with a family member, whether you agree to loan or not. In some cases, refusing to loan a friend or family member can save you from unanticipated trouble.

Loaning Money to Family and Friends Should Not Leave Your Relationship Broken

With the increasing financial dependency in families, getting loan requests is a common occurrence. Instead of failing a loved one, you can follow these guidelines that will somehow guarantee that you get your money back and maintain the relationship.

Ensure you review these guidelines before loaning money to family. Commit an amount you can afford. However, seeking sustainable ways to improve the financial stability of your family is crucial.

One of the ways to help a family member who needs financial assistance is empowering them to make their own money. You can give them payable tasks. The job allows an individual to enhance his skills and earn money diligently.

Contact us for any queries on credit cards, and financial solutions for your emergent money needs.

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