Friday, 8 December 2023

Lending Cash to Your Family? What to Consider First

Lending Cash to Your Family? What to Consider First
26 Feb

Being in a money bind can cause a load of distress not only emotionally, but also financially. Some may turn to you for money, but is it the best idea?

They could take out a personal loan, but bad credit may not even let them qualify. And even if they did, they may not be able to afford the possibly high monthly payments and interest. Turning to family may be their only option.

If you’re considering lending money to family, remember to take precautions so that both sides are happy.

How to lend money to family

There are a few ways to loan money to family members that you may want to review with your relatives when they ask for cash.

Make a written agreement

Anything written and signed by both sides means everyone agrees to the terms. Outline how much is being given, a payment plan and drastic “what ifs.” For example, what happens if you die before the loan is repaid? Have everything in writing, with a document signed by both parties.

If it’s a significant amount of money you’re lending, consider getting your agreement notarized or reviewed by a lawyer.

Charge interest

Like a bank or private lender would, you can implement an interest charge. This way, you not only get your money back but payment for allowing your relative to borrow from you in the first place.

Many people avoid taking out personal loans because of the possibility of high interest. You may want to consider a friendly interest amount for the sake of lending to someone you know. For example, charge 3% interest instead of, say, the 10% they might be charged if they took out a personal loan.

Charging interest might make payments more stressful for the borrower, but if they don’t have any other options and you want to ensure you get paid for lending money, it might be worth considering.

Implement a repayment plan

Don’t be vague about when you should get your money back; be as detailed as possible.

You can institute a monthly payment or say the full balance should be paid by a certain date. If the borrower doesn’t meet these deadlines, have a reprimand in place. Lending to friends and family is a lot different than a private lender. Institutions can report late payments to credit agencies, causing a borrower’s credit score to plummet. When lending money to someone you know, it’s much harder to put that practice in place.

Because of this, it helps to have a detailed plan in writing that is either notarized or checked out by a lawyer to ensure its accuracy.

Consider worst-case scenarios

If you’re lending money to family, especially children, you may jump at the chance to help without thinking about long-term outcomes.

Before you give out money, imagine what might happen if you don’t get your money back.

  • Do you hold a grudge?
  • Do you let it go and try not to think about it?
  • Do you lend them money again if they never repaid?

Ask yourself a few questions before handing over the money. Define what your worst-case scenario is and that way, you’re prepared for the worst.

How to protect yourself when lending money

There are a few steps you can take to make sure you’re protected, both financially and emotionally, when lending money to family.

  • Lower your expectations. There’s a big possibility that you’ll never get your money back. As a lender, you’re going to have to accept this. Due to this very real likelihood, you’ll want to keep low expectations. If your relative pays you back as promised, consider it a bonus.
  • Change is allowed. Follow up with your family to make sure they’re doing OK financially. See if your agreed-upon plan is still workable. Consider revising for plan B or even plan C. It’s helpful to be flexible.
  • Don’t lend money you can’t afford to give. If you have cash you were saving for a vacation, you might be more inclined to hand it over. But if it’s money you’re taking away from your retirement or paying off major a major expense yourself, take a pause. To protect yourself, it’s OK to say no.

Beware of tax laws

When you hand over money, the government considers it a monetary gift. Because of that, you’ll get taxed on that gift.

You can give up to $15,000 without facing gift taxes. If you’re handing over more than that, you could face taxation on your money. If you want to avoid getting taxed on the money you gift — even if you expect to get that money back — don’t give more than that.

Bottom line

Being the financial lender to a friend or family member can add a lot of unwanted stress and anguish to you and your loved ones. To lower stress, prepare your finances, and the borrower for how to handle the loan.

Whether you have a written agreement or you plan on making payments on behalf of someone else, you’ll need to have a plan in place. Try to steer clear of high expectations and if you don’t get your money back, don’t be surprised. Remember that if you can’t afford to lend someone money, it’s all right to tell them so.

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Dori Zinn
Dori Zinn |

Dori Zinn is a writer at MagnifyMoney. You can email Dori here


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