Borrowing from Family and Friends to Pay Off Debts

Borrowing from family members is often an easy way to get access to the funds that you need. Regardless of what type of project you are undertaking, there is a good chance that you will be able to find a family member that will help you finance it. If you are planning on borrowing from family members, here are a few things to keep in mind.

Get it in Writing

One of the most important things that you should do when planning to set up a loan between family members is to get it in writing. You need to write down all of the terms of the loan and make things official. Treat it just as you would if you are working with a bank. Write down the exact amount of loan, how long the loan is for, the interest rate, and any other specifications that were included in the loan. Many family members simply do things with a handshake. While this is noble, it usually ends up leading to problems in the future. One of the parties will forget one of the terms of the loan and it can end up hurting the other party. It is much better to get everything in writing on the front end so that you can avoid any problems in the future.

Pay-Back Plan

When you are setting up this loan, you need to make sure that you go over the pay-back plan. Some family members do not feel comfortable talking about deadlines and repayment terms in this situation. While it may not be comfortable, that is exactly what you need to do. You need to find out exactly how the individual plans to pay back the money and when it will occur.

Tax Laws

When setting up a loan between family members, it is important that you consider the tax implications of this scenario. If you are dealing with an amount that is less than $13,000, you could potentially treat it as a gift and not worry about any taxes. You may also want to consider setting up the loan as a demand loan. This means that you could potentially demand the entire loan amount to be repaid at anytime. When you do this, you can avoid headaches with the gift tax and the IRS. If you have a specific repayment schedule, the IRS is going to add up all of the interest that you would be charging to the borrower and count that as a gift. The lender will then have to account for the gift tax all in that same year.

Dangers

Borrowing money from family and friends is not always going to be your best solution. Although it is usually much easier to do this than to go through the credit approval process with the bank, it can lead to problems. The lender might never see the money again. If this happens, the relationship between the two parties will sour and the loan will continually come up between them.


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