Things to Consider When Lending Money to Family Members

A View from the Beach

A View from the Beach

Do you have a family member who has asked you for a loan? Banks aren’t lending money like they used to. Credit card companies are charging exorbitant interest rates. Home equity loans are almost nonexistent.

You may be their last resort!

But, there is a right way and a wrong way to lend money to family members. First the wrong way:


•You can’t afford to lose the money if they don’t pay you back.
•It destroys a family relationship (not just with them but with other family members) if they don’t pay you back.
•Based on the family member’s history, they are irresponsible and have never paid anybody back.
•You feel “guilty” about THEIR situation.
•If your spouse (or other family members) objects to your lending the money.

The bottom line: Don’t lend the money! Don’t get personal either. Just tell them that YOU cannot afford to lend them the money at this time!

Next, the right way! If you feel that they are responsible and that they WILL pay you back, pretend you are a lending institution and make them go through the same things that a bank would make them go through.

•Ask them to get a current copy of their credit report and to share it with you. (Look for late payments, collections or judgments at the end of the report.)
•Ask for written details on how they plan to pay you back. (This may include how much money they are making now and what bills they are paying—which you can cross-reference with the credit report.)
•Prepare a promissory note with repayment terms and interest rate, and be sure to include a late fee penalty if they don’t make their payments on time.
•Have the paperwork signed and notarized. Have 2 witnesses sign it as well.

Check out the IRS Rules – You will have to report the income of the interest you receive each year. Even if you DON’T charge interest, the IRS says that you HAVE to report a minimum rate on your income tax returns. Go to IRS.gov and type in “Index of Applicable Federal Rates,” and it will give you the minimum rates that you will have to report.

Check out this Website – LoanBack.com. It costs between $15 and $30 but it will help you with an online repayment calculator and repayment forms. You can also set it up so an email is sent to your family member that shows a payment will be due and on what date.

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