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What is the Best Way to Lend Money to Family and Friends? – Part 2

What is the Best Way to Lend Money to Family and Friends? – Part 2

In our last entry, we took a close look at why it can be extremely advantageous for everyone involved to give a personal loan to a friend or relative. On one hand, you help your friend or relative in a moment of need and at rates that are sure to be far lower that what he or she would find at a local bank or lending company. On the other, you earn a small bit of extra income thanks to the interest rate you charge your friend or relative.

However, not everything is that simple all the time: Things can go wrong and your loved one could incur in payment defaults, affecting your finances directly. This is what makes it extremely necessary to always take the necessary measures to secure your finances whenever giving out a personal loan to a friend or relative.

We already took a look at a few of the most important measures for securing your investment on your friend and family. Now, let’s keep looking at a few more reasons on how to do it the right way.

Always Loan With a Reasonable Interest Rate:

If you give your friend or relative a personal loan with a high interest, you might make it difficult for them to repay you. On the other hand, placing an extremely low interest rate on the personal loan will make your earnings insubstantial. In fact, the IRS requires that all personal loans between friends and family to reflect the current interest rate in commercial loan market. If your personal loan does not comply, you might be required to pay taxes, so make sure to visit the website of the IRS for more information.

Also, here is a nice piece of advice: If you loan money to help someone else with their mortgage, use the website to take advantage of some really nice tax benefits.

Protect Your Family Members:

If you happen to give a personal loan to one of your children or to any friend or relative, always consider adding a shot paragraph to the signed agreement that details what should be done if you were to die. Let’s say for example, that after giving out a personal loan to a friend you add a clause stipulating that in the event of your death, the loan needs to be paid back. So if you happen to pas away, your friend would still have to repay your personal loan either to the state or to someone you choose. That way your family’s capital won’t be affected.

Always Work Together:

Tend to always be proactive and encourage communication with your friend or relative if for some reason they can’t repay the personal loan on time. If so, work together to develop a new repayment plan. Don’t simply take a “sorry” for an excuse. If they have trouble paying you on a specified date, then designate another one, otherwise, you risk that they will default again. In short, be understanding but firm at the same time.

What really matters here is that the person who owes you for the personal loan gets fully committed to repay you on time. Otherwise, you risk the borrower feels that the personal loan amount is not that important for you.

And there you go. Giving out personal loan to friends and relatives always comes with a risk. However, if you take control of every aspect of the personal loan you can minimize it and benefit both you and your friend or relative. So take a good look at all these measures and the ones outlined in our last entry and you will be on your way to a secure transaction.