Tips for Borrowing from a Family Member

Written by , April 5, 2011

Tips for Borrowing from a Family MemberWhen you need to borrow money, your first stop is likely to be the bank. But depending on your particular circumstances, they may or may not be willing to help you. If you strike out there, where do you go next?

Lots of people turn to their families when they are in need of a loan but can’t get it from traditional sources. While family members are often willing to lend a helping hand, doing so can create a sticky situation. If you’re unable to repay, it could destroy your relationship not only with the lender, but with other family members.

Here is some advice and tips that will help keep a good turn from turning into a disaster.

  • Only Ask to Borrow from a Family Member if it’s for Something Important. This is a judgment call, but be sure to be realistic. Is it really something that you need? Money for a primary vehicle, repairs on an existing one or necessary home repairs would qualify. Funds for a luxury vacation, a home entertainment system or a new wardrobe probably would not.
  • Ask Only Family Members Who are in a Position to Lend Money. Your parents, for example, might be more than willing to help, but if they have to tap out their retirement accounts to do so, you’re setting yourself up for grief from them and other family members. It’s better to find someone who has plenty to invest, even if you’ll have to work harder to convince them to lend to you.
  • Work Out an Interest Rate That’s Favorable to Both Parties. Relatives are usually willing to lend money at lower rates than banks, but there should be something in it for them, too. Offer to pay an interest rate that is higher than what they would get from a bank savings account, and you’ll increase your chance of getting a positive response.
  • Put it in Writing. Just because you’re borrowing from someone close to you, that doesn’t mean you should rely on a simple handshake. Writing up a contract will give the borrower added assurance that you will meet your obligation, as well as recourse if you fail to do so. It’s a good idea to get an attorney involved, but you can find suitable loan agreement templates online.
  • Know the Tax Implications of the Loan. You’ll need to keep a copy of your paperwork to prove to the IRS that the money is a loan and not income if necessary. The proceeds may still be considered income if the lender dies before the loan is paid off and you do not repay the remaining amount to the estate. An accountant or tax professional can help you prepare for such possibilities.
  • Borrowing from a family member has its benefits, but it’s far from an ideal situation. Still, it may be your only option. Handling it properly will allow you to get the money you need while avoiding hurt feelings and legal complications.

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