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Considering Intra-Family Loans

A not uncommon situation in many families is the interplay between family members with more goals than funds and those with more money than goals to spend on. The familial relationship makes for a desire to help other family members in need and to take that action within the family without the need to go to a bank or other source of funding.
If you face this situation, an important consideration is how the transaction should be carried out. Even though it is within the family, a simple handshake and verbal agreement is probably not enough for either party. Human nature being what it is, not long after the money changes hands, one party or another might have forgotten the terms such as when and how often payments are due, what the interest rate, if any, might be and most important how much is to be paid with any installment. Then comes the hurt feelings and anger and all of that.
Perhaps the best way to avoid much of the potential for any problems is to treat the loan just like a real business transaction, which in fact it is. Agree on the terms – the loan principal, the loan interest, the term in months or years for the loan, when payments are to begin and so on. The writing should be signed by both sides and copies retained by each.  Then both sides should keep track of the payments made and the changing balance over time. 
Having an agreement protects both sides and does not stand in the way of the lender deciding at a future time to make some portion of the loan a gift or forgiving the balance entirely. The lender should be aware that the interest charged, if any, is treated as income to the lender while a forgiveness of a debt may result in income to the borrower. Of course, this entire discussion is moot where a family member plans to make a gift outright to another family member, not expecting repayment in any way. So perhaps, where helping a family member financially is a goal, the next step is to make a decision whether it is a gift or a business transaction and proceed from there. Understanding the ramifications of either approach will help prevent any future disagreement or misunderstanding. 


1 Comment to Considering Intra-Family Loans:

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David on Tuesday, September 17, 2019 2:35 AM
Thanks
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