The thought of family financing is common when you or one of your relatives needs money. While it may be a great choice, don’t move forward with a family financing deal until you understand how to do it right. Let’s review how family financing is used and what to watch out for.
Is Family Financing Risky?
Any lender needs to realize that things can go wrong. Borrowers might not repay a loan, or they may otherwise behave differently than expected. If you make a loan, you may lose your money.
A family financing deal adds additional risks:
- Relationships may suffer
- Poorly set up deals may be illegal or disqualify relatives from certain benefits
How do you make sure that family financing does not ruin your family? Document and discuss. Talk about every aspect of the deal and use written agreements. Consult with local attorneys to make sure a well-intentioned family financing gesture doesn’t put anybody at risk.
Depending on the circumstances, family financing may be less risky than other ways of helping. When co-signing on a loan, your relative may get money and build credit, but your credit can suffer if things go bad.
Where is Family Financing Used?
Anywhere you want. When you can match somebody who has money with somebody who needs money, family financing is an option. Some of the most common uses are below.
Home Loans - parents and other relatives often provide some type of family financing for young folks buying a home. While informal arrangements may work fine, some families decide to formalize home loans to protect the lender and pursue tax benefits.
Work with local attorneys to draft agreements, and research online services that can handle everything for you.
Business - relatives may want to help fund a business. They may make loans, or take an ownership interest. Again, work with professionals familiar with family financing and local laws. Some resources to get you started:
Student Loans - There are several ways to help relatives with higher education expenses. If you want to use a loan and improve the chances of getting repaid, formalize it. Some online services focus on family financing for students:
Other Loans - You might use family financing for an infinite number of needs (personal loans, debt consolidation, medical bills, etc). If you want to be especially flexible, there are generic loan agreements you can customize as needed.
Talk to local attorneys and search online for family financing services that meet your needs. Virgin Money has flexible programs that provide agreements and handle logistics (such as payment processing and credit reporting).
