Should You Loan Money to a Family Member?
Although I’ve never loaned a significant amount of money with interest to a family member I could see where this might present some challenges. Especially if money or a loan agreement comes between the relationship.
I’ve always had a rule that I don’t perform financial coaching or deal too closely with personal money issues with anyone I sit across from at the Thanksgiving table. Certainly I would help in providing financial advice if it were requested and needed. But provide a loan? Keep reading to get my final thoughts.
I’m sure there are people who have found loaning money to family a rewarding experience that benefits all parties involved. Money recently provided some tips to consider if you do choose to make a personal loan. I thought their list was pretty good advice and is one I would refer to if I ever did find myself considering making a loan.
Tips for loaning money to family
Consider your personal situation
Look at your personal situation carefully before deciding to loan money and make sure you’re not adversely impacting it. You certainly want to be careful about loaning money if it is going to impact your financial goals. For example, if you’re building an emergency fund, you don’t want to stop short and not have the money in the face of a financial storm.
Borrower’s history
Check out the borrower’s history. Even for family members it is a good idea to request they retrieve their credit score so that you can better assess risk with them fulfilling their loan obligations.
IRS lending considerations
Watch out for IRS rules when lending. Obviously, you have to declare and pay tax on any interest earned with the loan. You also need to make sure you have a minimum rate for the loan which is called the applicable federal rates. Go to IRS.gov and search “index of applicable federal rates” to find the proper rate.
Formalize the lending agreement
Make the agreement formal. This is good advice in that you should have records associated with the loan. Look for promissory notes online you can download and use or pay a 3rd party to draw up the agreement for you. There are also a number of websites that manage the entire process for you. One in particular I’ve heard about is Lending Club.
Wrapping up, I’d like to be in the situation to give money to help a family member rather than a loan. In other words, if I have the money to loan, I would just soon give it as a gift.
With giving I’m not in any way encouraging the family member to become slave to the lender which helps them follow Biblical financial principles of good stewardship. It also insures we can still have fun around the Thanksgiving table. Of course it’s important to really assess the true need for the loan or gift before taking action.
What is your opinion of loaning money to family members?
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I have never lent money to a family member either, but I agree that having a WRITTEN, formal agreement saves a lot of “he said, she said” business when it comes time to collect
This is usually not a problem for people who are punctual with paying back loans, but can mean EVERYTHING for those who end up being financial deadbeats.
Yep, FB. If you choose to loan to family, or even friends, a formal agreement can save a lot of heartache in the long run. Thanks for your comment.
Didn’t know if you wanted more information about the taxes associated with intra family loans?
http://www.myjourneytomillions.com/articles/tax-mechanics-of-intra-family-loans/
Evan´s last blog ..I Won a $1,000 – What am I going to Do With It?
best bet is not to loan to friends or family. It changes the relationship. Can cause fights and problems. If you have money and want to help someone, just give it to them with one catch. They have to help someone else someday when they can.
I think that’s a good approach, Arthur. I like your point about them helping someone else someday when they can. Perhaps the gift postitions them better to do this. A nice thing to think about.