It may sound like a good idea to lend money to a family member or borrow from one. The reasons for that are obvious: the borrower usually gets quick approval, and the interest they pay stays within the family instead of going to a traditional bank.
Family loans can be successful provided that you know how to plan and arrange them. Remember that you will have to deal not only with administrative matters but also with the emotional side of things.
Learn how to lend and borrow money with family and protect your relationships.
Are Family Loans Popular?
A family loan involves only family members. It’s neither a loan you take out from a credit union, a traditional bank nor quick online loans from web-based financial service providers.
Loans from family members amount to $90 billion annually in the U.S., according to the Federal Reserve Board Survey of Consumer Finances. Purchasing a home and starting a business are among the top reasons for taking a family loan.
A recent research by Fundable proved that 38% of startups depended on money taken from friends or family. Other widespread reasons may include a sudden illness or temporary unemployment.
How to Protect Your Money
If you are willing to lend money to your family member, keep in mind that it may not be paid off in full. The new research by LendingTree showed that typically only 57% of the money is given back to relatives who lent it.
Mike Keeler, a certified financial coach from Peak Financial Solutions says, “I don’t recommend lending big sums of money to family members, but if you do, don’t give out more than you can consider a gift.”
It is a wise decision to sign a loan agreement regardless of your relationship with the borrower. This document will be similar to a standard loan contract you sign in with the bank or any other financial institution. Basic conditions for a loan contract with family members should include the sum borrowed, the interest rate and the repayment terms.
Also, you need to think about various scenarios including the case of nonpayment. State clearly in the loan agreement what will be done if the family member can’t repay the loan: you may want to modify the loan terms, add extra costs, take ownership of collateral, or even pursue legal action.
What Happens If You Are a Borrower?
You need to take responsibility for your action as a loan agreement between family members is the same legal document you will get at the bank or credit union. So, make sure you borrow wisely.
Don’t ask for more money that you really need or will be able to repay in time. In case you fail to abide by the conditions of the loan contract, your family member who is also your lender may take
legal action against you.
You probably don’t want to turn your relationship because of money. So, if you can’t negotiate more affordable loan terms privately, you may turn to a lawyer who will either negotiate to add the part you can’t pay off to a debt settlement contract or include it in a debt consolidation loan.
What to Do If You Are a Lender?
If you still want to lend the money to your loved one and you’ve examined all the possible outcomes connected with this decision, here are a few things to think about that may lead you to a positive outcome.
First of all, ask for a plan where the borrowers will spend the money and their repayment schedule. Check the borrowers’ finances and make certain they understand that this is a loan but not a gift.
It’s important to protect your relationships and sign a loan agreement so that you don’t have any issues with your family members in the future.