The idea of lending money to a relative may initially sound like a good idea and the right thing to do, but it could forever alter your family dynamics. You might think twice about handing over a check after pondering how possible failure to pay back the money could affect your relationship. Before you lend money to a relative, communicate the terms of the loan. Both you and your family member should understand and agree to the conditions for a repayment plan.
Step 1
Check your own books and accounts to ensure that you have the money to lend. Sometimes relatives mistakenly believe that their family members are in a better financial position when this simply isn't true. Examine your financial situation to ensure that lending money is feasible. If you're married, you'll also need to discuss the idea with your spouse to gauge how comfortable he or she is with the idea of lending money to a relative.
Step 2
Ask your relative what the money is for. While it may cause hurt feelings, no bank would ever lend money without asking what the money is being used for. Bank Rate notes that you may find a difference between lending money for a relative's business scheme and lending money to help pay for groceries and rent while he's out of a job.
Step 3
Agree on a rate of interest. You may want to offer the loan interest free, but remember by loaning money, that money is no longer earning interest in the bank, notes Lending Tree. It's a good idea to charge the rate of interest that money would be earning had it been in savings.
Lending Tree recommends that you call the Internal Revenue Service with the amount you're planning on lending and asking how that will affect your taxes; you may need to pay taxes on your interest if the loan is over $10,000. They can suggest a fair interest rate to charge your family member.
Step 4
Talk about the terms and conditions of the loan. You should both be comfortable with the interest rate, plans for repayment, and date when the loan is to be settled. Communicating before there's a problem will go a long way to keep the peace throughout the life of the loan, Los Angeles CPA Michael Eisenberg tells "Forbes" magazine. Make sure your relative knows the difference between a loan and a gift to avoid further problems and misunderstandings.
Step 5
Draw a contract that lists the loan amount, monthly payments, repayment date and interest rate, says MSN Money Central. In the future, if you have problems, you can use the contract as a point of agreement between you and your relative to prove that you both agreed to the terms. Sign and date the contract with a notary public if possible. If the loan isn't repaid, and you regrettably need legal action, your contract can stand as evidence of an agreement.
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