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The Best Way to Loan Money to Family Members

16, Jan 2013 Posted by : Comments : Comments Off

Loaning money to family members can be a risky situation. The relationships that you build with your family can quickly deteriorate when large sums of money come into play. It’s important that you handle loans to family members responsibly. While most people are fairly generous and don’t mind helping out other family members, it’s important to be stern and not provide too much flexibility with your family. The tips below should help you arrange a loan with a family member in a way that’s safe and agreeable to both sides.

Set an interest rate – A loan should not be free

Family members have a tendency to loan money without interest. While this is a great way to help someone out so that they can get back on their feet, it doesn’t help them build responsibility. The loan should have a low interest rate, but there should still be some type of interest. Something along the lines of 5% – 10% is perfect for a family loan.

Set a repayment period and terms for late payments

Issues arise with family loans when the person receiving the loan fails to make payments within a reasonable amount of time. The family member issuing the loan will grow impatient but they will usually hold back and avoid confrontation because they are family. The issue here is that by holding back, your feelings toward the matter will become “bottled up” and when you’re ready to confront your family, it’s probably not going to go well. The best way to handle this is to set clear terms for repayment prior to providing the loan. This way, your family knows and understands what is expected of them. If they are late on repayment, then you need to have an agreement set in place for repercussions. It’s important to charge money when the repayment terms have not been met and a payment is late. In doing so, you will require them to repay the loan before the extra fees begin to stack up.

Have a written agreement signed by both parties

Unless you have a written agreement signed by both parties, then none of the terms that you have set will really mean anything. Face to face agreements that are not on paper will not hold up in court. While you probably would never take a family member to court unless it was absolutely necessary, a written agreement shows your family members that you’re serious about the loan. It’s important that your family see this and understand that you’re still going to protect yourself and your finances.

Require a small down payment or require a timely first payment

It’s important that the family member you’re loaning money to begin to repay you fairly quickly. By requiring a small down payment or requiring that the first payment be made toward the loan within the first two weeks, you will help them begin to repay the loan and get used to the monthly payments. It’s important that they adjust to this smoothly and become accustom to paying the loan on time.

Only lend an amount of money that you’re comfortable with

When lending to family, it’s important to only lend money that you could afford to lose. If things don’t go according to plan, getting your money back could take a considerable period of time. It doesn’t matter how clear you are about your expectations, family members always have a tendency to neglect repayment because of the relationship they have with you. If you only lend what you can afford to lose, it won’t matter how long it takes to be repaid.

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