Family loans can help you quickly bridge an income gap or cover an unexpected expense. They can help you avoid expensive no-credit-check loans and don’t have many barriers to approval, but the potential downsides include tax implications and a bit of awkwardness.
Use a family loan agreement to avoid issues that may arise during the repayment period. This is a contract that spells out the terms and conditions of the loan.
Having a notarized and signed agreement with a family member may seem impersonal, but having things in writing can prevent misunderstandings and frustrations. Be sure to include both parties in the decision-making process.
Here’s what to include in your family loan agreement:
The amount borrowed and how it will be used.
Repayment terms, including payment amounts, frequency and when the loan will be repaid in full.
The loan’s interest rate. The IRS sets an applicable federal rate each month, which is the minimum interest rate allowed for private loans over.
If the loan can be repaid early without penalty, and how much interest will be saved by early repayment.
What happens if the borrower stops paying, whether it’s temporarily due to an emergency, or entirely.
A tip to make things easier on the lender: Have an idea of how much you need to borrow, what it’s for and when and how you plan to repay the loan when you approach them about borrowing
Learn Way to Insurance