Monday, 22 October 2018

In an ideal world, borrowing money from your family would seem like a straightforward solution for paying down high-interest debt, funding a large purchase, or starting a new business.

But there's a lot to consider when asking a family member to borrow money, says BBVA Compass Financial Planner Jennifer Williams, as even the closest of family ties can become strained when money becomes an issue.

Advantages of borrowing from a family member

Borrowing from family certainly does have advantages. There are no forms to fill out, no loan processing delay, low or no interest, probably no fees, and flexible repayment terms. What's more, chances are there will be no legal action, credit damage, or repossession of your assets if you fail to repay the loan.

Potential disadvantages of family lending

“You don't want it to ruin a relationship," she says. If the terms aren't clear or if there's a failure to repay, you don't want your family member to resent you or question every purchase you make — such as a vacation or new clothing. “I think asking for money is a humbling experience so if the lender makes rude comments, that could go badly," Williams said.

Borrowing from family the right way

Provide a reason for borrowing

First of all, your family member will undoubtedly want to know why you need the money. Was your home destroyed by a natural disaster and you're waiting for an insurance check? Or did you accumulate consumer debt by living beyond your means? The reason for the loan could influence your family member's willingness to make the loan.

Get it in writing and keep good records

Like any financial transaction, you'll want a contract containing the date, amount of the loan, interest rate, and the frequency, amount, and method of payment (cash, check, in person, or through a bank or online payment system). The contract should also include details about any collateral associated with the loan, and what will happen if you're late or miss payments entirely.

You'll also need to provide a plan for paying it back, or a payment schedule, just like a bank loan. Also, make sure you get a receipt for each payment you make, especially if it's in cash.

Give the lender options

If you are borrowing the money to pay off an existing debt, such as a credit card balance, you might want to offer the relative the option to pay the debt directly instead of passing money through you. This way they will know payments are being made and you're not incurring extra interest or fees.

Don't forget about taxes

You must also consider any tax implications for either you or the lender. For example, the IRS gift tax rule requires the lender to charge a nominal interest rate if the loan is more than $14,000.

Show you're serious

One way to inspire confidence in your family member is by showing them you have a plan for raising the money to repay the loan. This might mean taking on some extra work, asking for a raise, getting a roommate, or cutting expenses.

Ask for help

As part of the loan agreement, you can ask your family member to help you better understand how to manage your money and avoid future financial problems.

What if you're trying to fund a new business?

If you're asking a family member for a substantial amount to fund a business, the Small Business Administration offers these tips:

  • Choose a family member who understands business and the risks he or she is taking.
  • Have a solid plan in hand.
  • Don't shoot for the moon — ask for the minimum amount you'll need for each phase.
  • Determine if the lending relative will get a share in the business and what their role will be, if any.

 

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