Borrowing money from family and loved ones

Let’s face it. Financing a car, home or college can be very expensive. As a result, borrowing money to pay for such a large investment is almost inevitable. You may be considering borrowing money through a family member or a loved one. This can be a feasible alternative to traditional bank borrowing; however, you must realize that there are still strings attached and rules to follow. And it’s important to your relationship that you treat a loan from a family member or loved one like you would a traditional loan. Read below for a few helpful steps for borrowing money through family.

Do your research
Although money borrowed from family functions the same way as cash provided by a bank, the loan arrangement can be very different. You should do some research on current interest rates and tax conditions for inter-family loans. Loans from family members often have different interest rates and tax conditions than a loan from a traditional bank, so it’s a good idea to educate yourself in these areas before signing on the dotted line.

Choose a feasible payment schedule
You may feel pressure to choose loan terms that are shorter or more aggressive than you truly feel comfortable. If so, speak up. Setting a loan type and payment schedule that is realistic only helps you – and the family member who is loaning you money. In the end, you both have the same goal – that you pay off your loan.

Draw up a contract or promissory note
The idea of drawing up and signing a legal contract may be scary at first, but in the long run, it’s a no brainer. And the process doesn’t have to be complicated. You can have an attorney draw up a simple contract for you that details the terms of your borrowing agreement or you can use a promissory note. A promissory note is a legally binding document in which you set out the terms of the loan, including how much money you received, the interest rate that was agreed upon, how long you have to repay the loan, and the rate of repayment. A contract or promissory note provides much needed structure to your borrowing agreement, detailing the loan’s payment length, payment amount and terms and conditions. It also provides both parties with the legitimate documentation needed for any tax or legal purposes. It is wise to consult your attorney before you enter into any sort of legal agreement or contract.

File your taxes appropriately
It’s important that you understand the tax implications before you borrow money from a family member or loved one. If you plan on borrowing a significant amount of money, you should make sure it is properly documented in case it comes under scrutiny from the IRS. For tax purposes, it is important to be able to document that a transaction is a loan -- not a gift. It is advisable to work with your attorney or accountant to make sure your taxes and your lender’s taxes are handled correctly.

Treat the relationship as a business one
Sure, they are still mom and dad, but when it comes to a loan relationship keep it professional. Be sure to make your payments on time and keep up with the contract’s terms and conditions. It’s easy to become lax when you are dealing with family, but in the long run, your relationship will suffer if the borrowing agreement is not handled responsibly.

As a final tip, always keep the lines of communication open. If you have problems with your loan arrangement or have questions that need answering, talk them out. No investment is worth weakening your family ties.


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