“It`s common for people to apply for a loan from friends or family members,” says Priyanka Prakash, a credit expert at Fundera, a small business financial solutions marketplace. “People apply for loans to start businesses, get medical procedures, go to school and many other purposes.” She says that while it`s okay to borrow and lend money, both parties should take the loan seriously. “Treat this like any other loan so there are no misunderstandings,” she says. In addition, Joyce Blue, an expert in monetary relations, suggests having the contract notarized. “That way, if something goes wrong, you`re protected,” she tells Bustle. As with everything, only you can weigh the pros and cons and make the best decision about lending money to someone – or not. “By treating loans between family and friends as a business transaction, consumers can protect themselves from the damage done to a significant relationship because of the money,” Trumble added. “While you may be inclined to help a loved one with finances, it`s important to communicate openly about repayment expectations so that no one is left in the dark, or worse, in the red.” Prakash agrees that it may sometimes be necessary to ask for guarantees. “If it`s a large loan and you have doubts about the borrower`s ability to repay you, the guarantee can protect you,” she says. For example, if the borrower does not repay the loan, you can get a court order to sell the property and get most of your money back that way. Just keep in mind that when things get to this point, the relationship will almost certainly be ruined, so be careful who you lend money to in the first place! A family loan, sometimes called a family loan, is all ready between family members. It can be used by one family member to lend money to another or borrow it from another or as a means of transferring assets – the purpose does not matter.
It`s just a loan that no bank, credit union or other traditional lender outside the family uses. “When you lend money to a family member, you can deplete your cash reserves, but much more important for your marriage,” Murphy said. “This is crucial. If you are approached, be sure to involve your partner immediately. “What happens if you borrow money and the debtor doesn`t pay you back? Unlike an institutional lender, individuals have limited resources and experience when it comes to collecting debt. If the loan amount is relatively small, you can take the debtor to small claims court. Every state has small claims courts before which you can represent yourself, and the parties cannot be represented by a lawyer. Interest rates fall under the definition and definition of local usury laws. Usury laws regulate the amount of interest that can be charged on a loan by a lender based in a particular region. In the United States, each state establishes its own usurious laws and usurious interest rates. A loan or line of credit is therefore considered illegal if the interest rate exceeds the amount required by state law.
If the loss of this amount of money would cause you serious financial damage, you can choose to say so and avoid the loan. If you continue, you may want to set terms in a written promissory note that both parties can agree and abide by. Yes, you can, but the tax implications can be difficult and complicated. You would have earned interest on the money if you had kept it in an interest-bearing account, and that`s a good reason to charge interest. However, occasional lenders could unknowingly cause tax problems if they don`t structure their loans wisely, get all the details in writing, and have the agreement signed in writing by lenders and borrowers. Ask a lawyer if you want to set up your loan agreement to avoid costly mistakes in the future. Whether you lend money to the family or borrow money from the family, the loan usually needs to be mutually beneficial to the borrower and the lender in order to keep your family intact. In particular, lenders need to understand the alternatives, risks, and tax implications of a family loan. Byron Ellis, a certified financial planner at United Capital Financial Life Management and founder of the blog Doing Money Right, agrees to the creation of a loan agreement, but with a caveat.
“To make your loan agreement legally binding, the lender and borrower must sign documents outlining the specific terms of the agreement,” he told Bustle. He says you can choose whether a lawyer creates these documents or wants to find an online contract that meets your needs. “Either way, having one can help protect your investment and avoid disputes between friends or family.” An illegal loan can also be a form of credit or loan that obscures its actual cost or does not disclose the relevant terms regarding the debt or information about the lender. This type of loan violates the Truth in Lending Act (TILA). Kevin Murphy, a senior financial consultant at McGraw-Hill Federal, a New Jersey-based credit union, recommends compiling a checklist if you want to lend money to a family member. The law does not prescribe who can obtain or be denied credit (apart from general norms of discrimination based on race, sex, creed, etc.). It also doesn`t regulate the interest rates a lender can charge. .