How to Loan Money to Family Members

How to Loan Money to Family Members How to Loan Money to Family Members Most financial experts advise against giving loans to your family members as the same will result in deteriorating the relationship in future. But you cannot bluntly refuse to loan money to a close family member who is short of cash or asks for a loan, which is rare and once in a while. You can listen to your heart and be generous, but at the same time take the required steps to avoid any future hassle with the member or your family relationship.

Instructions

You can set an interest rate which is fair and not so high so that both you and the borrowers maintain the level of comfort. As you are giving the money to a family member, instead of investing or depositing the same with a much safer organization or bank, you need to get the amount which at least compensates for the loss of revenue. Most of the loans among family members are traded as interest free, but as per the recent IRS guidelines, you have to pay tax on the imputed interest which is taxable even though its nature is pure imaginary. Also, if the loan amount exceeds the stipulated limit, IRS will consider it as a gift and you will end up paying a gift tax in spite of offering an actual loan. So try to avoid all these legal hassles and charge a nominal rate of interest on the loan which will benefit both you and the borrowing family member.
You may initially feel uncomfortable and even embarrassed when you ask the family member to draw up a loan agreement. But you will feel relaxed with such a document which will prove helpful in future when the borrower defaults the repayment in future. The can make an excuse by shifting the blame to your accountant, lawyer, or even spouse so that you can convince the family member to sign a promissory note or similar legally bound borrowing document. For a smaller sum, you can use any of the promissory notes available online or in legal books. But if you are lending a huge sum, ask your attorney to draft a borrowing document which contains all required terms like the borrowed amount, interest rate, late payment charges, and frequency and mode of interest and capital repayment.
When you loan some amount to a family member, he is allowed to repay the loan over a longer period of time than the duration allowed by normal money-lenders. Also, you cannot act as a loan collector and keep reminding the borrower frequently regarding the repayment. So it is always better to be clear about few details and make sure to include those in the drafted loan document. Ensure that the agreement includes the due date of payment, late fees to be charged, and the exact mode through which you want to receive the repayment amount. You can get back the payment through check, PayPal account or your normal bank account. Avoid receiving the repayment in cash as there will not be any proof to confirm your receipt at the time of future disputes with the family member. Another option is get the amount transferred from the borrower’s account to your bank account, which will save a lot of time and effort on your part.