Five Questions to Ask When Loaning Money to Relatives
There are a lot of people in need of financial help right now, and some of these people may be related to you. There is nothing wrong with providing financial assistance to family members if you’re in a position to do so, but money matters also have a way of destroying relationships and tearing families apart if not handled appropriately.
Loans between family members have a reputation for going sour, and with good reason. In a recent survey, over 40% of respondents indicated that they had loaned money to family members without being paid back in full, and more than a quarter of those surveyed hadn’t received even a penny in the form of repayment. To avoid these problems, make sure you can answer these questions about the loan you’re considering:
-Â Is this a loan or a gift? Many families have that one relative that can’t seem to get their act together and once in a while you might be in a position to provide that relative with a bailout. You might hope to get repaid one day, but you don’t really count on it. Your expectations of whether or not you will be repaid should be clear to both the lender and the borrower. There is nothing wrong with a financial gift and there are tax benefits associated with gifting, but you should give gifts knowing that you are not expecting repayment.
-Â What is the money needed for? For some this is not a vital issue to understand, but if you care about your relative and your money, you won’t want it thrown away to an idea or a scam that you wouldn’t approve of. If your relative is trying to start a business, for example, ask to see a written business plan. Look at the decision of whether or not to extend a loan as an investment decision instead of a personal decision.
-Â What are the terms of the loan? There are many specific factors that should be made clear when making a loan. When is full repayment expected? Will the borrower make payments along the way? What rate of interest, if any, will be associated with the loan? Will there be penalties if payments are late or missed entirely. Many of the problems that arise between family members in lending situations are a result of unclear expectations from the start.
-Â Is the agreement in writing? This doesn’t need to be a set of documents drawn up by an attorney, although it can be if the situation warrants it. However, putting the terms of the loan on paper and asking the borrower to sign it will help to reduce confusion and set clear expectations.
-Are you in a position to loan money? Some people have big hearts and great intentions, but they don’t have the net worth to back up the loans they’re willing to make. Don’t put yourself in a position where you become the one asking for help because of overextending yourself to help others in need.
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