Show Caution with Family Loans

Lending money between family members can be tricky. You may want to help your son, daughter or extended family member start his or her own business, buy a house or finance a college education. But the question always remains–will the social loan be repaid? If you are thinking of making a family loan or asking for one, these quick guidelines may be helpful.

Before Lending

When you lend money to anyone, you are playing the part of the investor. Before you agree to lend a cent, judge his or her plan as you would any other business venture.

Many social loans are under-documented. Treat the loan as a business transaction by writing up a loan agreement. Include fees for late payments and other appropriate fees and interest rates in the contract. In addition, make sure your arrangement conforms to standard business practices to ensure the loan remains separate from your personal relationship. You might even consider hiring a business lawyer to finalize the documents, coordinate loan securities, and further separate the loan from all family matters.

However, if you decide to decline financing, tell the borrower as soon as possible without criticizing the plan. Remember, lending money to family is a big decision. Always consider the ability to repay, what other family members will think when they hear about the loan, and how you will react if the loan defaults.

Before Borrowing

If you are seeking funding for a solid business idea, or simply need the money for school, present it to a lending institution first. The lender will give you an impartial evaluation and offer you the loan if you qualify. But, if your only option is to borrow from a family member, give your relative as much information as possible.

Lending money is always a risky venture, especially to family members. Do not lend money to a family member if you can’t afford to lose it. As a borrower, do not accept money from a relative who cannot afford to lose it. In addition, be open to input and ideas. The financial wisdom of a more experienced family member may be just as valuable as the loan itself.