What is a Family Loan?
A family loan is any loan between family members. It doesn’t matter what the money is for. It’s just a loan that does not use a bank or other traditional lender.
To properly design a family loan, the deal must make financial sense. It should be:
- A good deal for the borrower
- A good deal for the lender
- Compliant with local laws and tax laws
Forgiving loan balances or payments, and charging too little interest on a family loan can create problems. Make sure you consult with a tax expert to see if your loan follows all the rules. Lenders generally have to charge at least the Applicable Federal Rate (AFR), and follow other requirements.
A family loan is more than a business transaction. Since you know the other party, you should be aware that personal issues make the deal more complicated. Relationships can end on a sour note, holidays can be awkward, and others (who were not part of the deal) can end up in a tough situation if a family loan goes bad.
To reduce the likelihood of problems, be open about everything. There’s no such thing as being too precise or clear about your objectives. Double check with your family members to ensure they see things the same way you do.
Some people say that these loans are always a bad idea. They suggest that you give the money to the family member, or find another way to help them indirectly. Consider all the possibilities before making a family loan.
The best way to do a family loan is with a formal document. Spell out the terms of the loan just like a bank would. If any collateral is used, be sure the document is sufficient to secure the lender’s interest (work with an attorney to make sure documents will work in your state).
Family Loan Services
If you want help with a family loan, there are several services that provide documentation, legal matters, and payments. These P2P lending sites may help with your family loan:
How to Blow It
Setting up a family loan is a big deal. Make sure you watch out for some common pitfalls before you move forward. For more ideas, see 7 Sins of Family Loans