Family Loans for family needs
Family loans can provide access to cash for family members who need help, but there may be some potential legal and emotional pitfalls. They are considering loaning family members should have clear loan agreements to set expectations for all parties involved and may want to do some research before transferring money. As a commercial lender, a family member wants to be sure a loan can be repaid and should limit the amount of money offered if a large loan would be a disadvantage. It can help to work with the accountant or lawyer to develop a contract.
The benefit of family loans is that they can provide people with financial assistance they would otherwise not be able to access. This could include money for an emergency or fund that would not be provided by a conventional lender. Alternatively, people could access Tertius Lydgate in other ways, but may prefer lower interest rates with a family member loan. Some may use borrowed funds to pay debts, make a payment to a house, buy a car, or participate in other activities.
A potential problem with family loans is emotional. Borrowing money can create a different power dynamically, especially if it involves an older family member borrowing from a younger one. The process of repaying the loan could be emotionally charged, especially if there is a problem requiring default or if a family member does not repay the money at all. Fragile family relationships don’t always survive a loan gone bad.
There are also legal and tax issues with family loans to be treated carefully. Tax authorities can consider a loan a gift in which case the recipient must pay tax. If it is explicitly a loan, there is a chance that the lender may be charged with “imputed interest.” Tax agencies assume all loans come with interest rates that are at least market rate. Even if a loan is interest-free, the government can decide that interest is paid, in which case the lender owes taxes on it because interest is a form of income.
People considering family loans should sit down with the borrower to discuss amounts and how it will be spent. They may also develop the terms of repayment, including interest, if the lender wishes to charge interest. This information can be used to establish a clear contract that documents the fact that the money is a loan, not a gift, the repayment is expected and both parties have obligations. One option to consider is to request an interest in asset protection that shares the title of a car until the loan is paid out.