Lending between family members, can benefit both sides. It’s a way to access needed money without the time, fees and high interest rates of official bank borrowing, plus in these times of low interest rates it can provide the family member who has the spare cash a way of earning a bit more interest. This can be a win-win situation. After all, paying a family member 5% sure beats paying a credit card company 15 or 20% and earning 5% sure beats the 1/2% a bank will pay you. If it is handled properly, cutting out the middleman can be a good idea.
Drawbacks of Borrowing from Family
Although, lending money to family members may seem like a good idea but it has its share of drawbacks and risks as well. Most problems occur when there isn’t a legally binding contract. Oral agreements can often turn sour much later on, due to a lack of evidence or paperwork to support a loan. This can include the original creditor not being repaid, or being paid back much slower than expected.
Even with family members, all loans should be done with paperwork and official contracts that spell out all the repayment details. This will keep both sides safe and free from misunderstandings. Even if you think the terms are clear… as time goes by, people forget (either conveniently or actually) and so it is helpful to have a piece of paper to refer to, which will help clear up any misunderstandings. This contract should spell out payment terms, early payment options and have a written schedule that breaks down each payment as to the due date and amount of principal and interest. By searching for “loan amortization schedule” you will find a variety of sites that will provide this type of breakdown. Print it out and give each person a copy.
You may think a written contract is unnecessary after all it’s “all in the family” but many family feuds start this way. It is best for everyone to have it in writing.
Joint Loans
Couples also have the option of joint loans. This can be useful when both need to borrow money for the same endeavour. This means two people are contributing to the same loan, which can arguably make the process easier to repay.
Of course, this also means a level of trust between the two people taking out such a loan. Even with partners, it helps to understand the financial situation of the person you’re dealing with.
Dealing with Family Relations
Of course, if you do lend to another member of the family, or are the one being lent money, there is a lot to consider. Terms and conditions should be agreed in advance, for instance will you accept flexible repayments? Strict repayments are harder to meet, where as flexible options ensure the full repayment is more inevitable.
As a lender, likewise, you shouldn’t lend money you can’t afford to lose. You should also be realistic about the repayment possibility. Understanding the financial situations of the other person is a priority. You can’t just assume they can pay because you want them to or because they say they will. Are they really able to repay? If a bank won’t loan them money there is probably a good reason. On the other hand, if they can get a loan but you are just giving them a lower interest rate, your chances of being repaid are much greater. Lending is not a guarantee and, as such, you need to be comfortable with the possibility of not getting the money back (on-time or at all), so be prepared for this possible risk.
Finally, as the one borrowing, bear in mind this is still a loan and not a gift. Don’t put your family in the awkward position of having to hound you for their money. Treat it just like a bank loan. Use the family relations to your advantage but don’t take advantage of them. Part of wise income planning is knowing that you can turn to people when things are difficult. But if you burn them once, they will be reluctant to trust you a second time.
See Also:
- Is Financing Your Child’s Mortgage Right for Your Family?
- Tips to Getting Quick Personal Loan Approval
- Earning More Money is Not the Answer
- Go Pro as the Family’s Budget Manager
- How to Overcome a Personal Debt Crisis: Save Yourself and Your Sanity in 5 Easy Steps
- Free Yourself From Debt
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