What is a Family Loan?

If you are in need of money to put a down payment on a house, purchase a car, or fund your education, you may want to approach a family member for a family loan. While many people take this option every year, the possibility of souring a relationship with a family member should make you think carefully about getting a family loan. Still, this can be a good option if the loan is planned well and the terms are clear. Many family loans have lower interest or no interest all. The family lender may require less or no security. For business loans, a family lender is less likely to require a detailed business plan. So here are some tips for securing a family loan if you have decided this is the best option for you.

1. Take the loan seriously.

Whether you are the borrower or the lender in a family loan, you should take the loan just as seriously as a bank would. The borrower should expect to repay the loan and abide by defined terms. The lender should not put his or her financial future at risk to issue a family loan. Generally, you should never lend more than you can afford to lose; assume that you may not be paid back. Also, feel free to refuse a request for a family loan—while this may cause a small rift in your relationship now, issuing a family loan that is not good for you will cause larger rifts in the future.

2. Take interest.

Depending upon the amount of your loan, you may be required by tax law to charge interest on a loan. Usually, there are no tax implications for the borrower or the lender if the loan is less than $10,000. However, for loans of $10,000 or over, you may be required to charge interest. This interest (even if the rate is very low) must be declared as taxable income by the lender. The borrower can usually deduct the interest for tax purposes.

2. Put it in writing.

No matter what the amount of the loan, the terms should be put in writing for the protection of the lender and the borrower. The loan document should include a repayment schedule, including the length of time the borrower has to repay the loan. Interest should be calculated into this repayment schedule; Microsoft Excel can easily calculate interest for you to make this easier. The loan document should also describe the purpose of the loan and what the loan will be used for. Also you may want to include a plan for resolving any problems or conflicts if they occur.

Image Credit:  Daniel * 1977, Flickr