Family loans
If you need an extra few thousand dollars to make a down
payment or to purchase a house, or are facing tuition fees or a
car purchase, borrowing from a family member may be a good
option. Thousands of Americans go this route every year. In
fact, the person-to-person loan market, including private
mortgages, is $65 billion annually.
If you're thinking of borrowing
from or lending to someone near and dear, think through the
impact it will have on your relationship first. Be sure
to put key terms of the loan in writing and consider getting
professional advice if the amount of the loan is substantial.
Family loans are tempting for
several reasons:
- they usually require less security, or none at all
- the interest is often lower, or non-existent
- the terms are more flexible
- the lender is less likely to require a detailed business
plan
If you're the borrower
It's convenient to get a family loan. But, if things go sour,
relationships can suffer. Even though the Bank of Mom and Dad is
the lender, you should treat the loan just as seriously as if it
were an arm's-length transaction.
If you're the lender
You need to avoid putting your own financial future at risk. As
a general rule, don't lend more than you can afford to lose --
there's always the possibility you won't be paid back. It's OK
to say no. Refusing a family member's request for money now
won't be as painful as dealing with payment problems in the
future.
Take an interest
There are tax implications for certain person-to-person loans.
As always, you should check with a tax consultant to determine
the requirements in your situation. However, as a general rule,
there are no tax implications for either party for loans under
$10,000. But you may be required to charge interest on loans of
more than $10,000. And with interest-bearing loans -- even if
the rate is very low -- the lender must declare the interest as
taxable income. If the borrower is using the money for business
purposes, he can generally deduct the interest when calculating
profit.
Get it in writing
For smaller loans, you may not need a formal legal agreement,
but you should put the key terms of the loan in writing. These
include:
- a repayment schedule, including dates, amounts and
interest (spreadsheet programs such as Excel include
templates that make this easy)
- a description of how the money will be used
- some explanation of how problems will be resolved if they
arise
In a dispute, these documents protect both parties from any
attempt to misrepresent the original terms. And if the borrower
is unable to repay the debt, the paperwork will help the lender
write it off as a non-business bad debt for income-tax purposes.
For best results, retain a qualified attorney to represent your
interests.
Talk to an expert
If the loan is substantial, or if it's going to be used for a
risky business venture, it's a good idea to seek the advice of a
lawyer or accountant. This will help both parties consider key
issues objectively and reach a decision everyone is comfortable
with. To save on fees, you may want to prepare a draft agreement
yourself and simply ask a professional to review it.
Use our free mortgage payment calculators:
1.How much do I have to earn?
Not sure how much money you'll have to earn to afford your house payment and accompanying expenses?
2.Mortgage payment calculator
Want to know how much your monthly payment is for your mortgage?
3.Bi-weekly mortgage calculator
Want to know how much time and money you'll save paying off your loan on a bi-weekly payment plan?
4.Additional payment calculator
How much do you save by paying more or making additional payments than your initial mortgage terms?
5.How much can I borrow?
Want to know how big of a mortgage you can take on?
6.Should I pay discount points?
Not sure if you should pay discount points on your mortgage loan?
7.How much will I save by refinancing my loan?
How long will it take to recoup the costs of refinancing my home mortgage?
8.How much will my tax deduction be?
Want to know how much your home mortgage will save you in taxes?
9.APR calculator
To find out the annual percentage rate of your loan, enter the loan amount, interest rate, points, other costs and year-length term.
10.Interest only monthly payment calculator
To find out the monthly savings you could gain from an interest-only payment plan.
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