Think about borrowing money from the family when you need it urgently

Nothing messes up interpersonal relationships faster or better than money. It’s usually not about the dollar amount itself — it’s the “principle”, and when it comes to loaning out or borrowing from family, informality actually works against everyone and “principles” like trust, transparency and accountability can be casualties.

For an agreement like this, it’s best to formalize the transaction, meaning that borrowers can expect interest to be charged.

How to Arrange a Loan Between Family Members

Borrowing money from the family is a big commitment for both the borrower and lender. Why? Because no one is thinking in those impersonal terms. Neither party is just a “borrower” or a “lender” — rather, they’re part of each other’s lives.

For the purposes of a loan, it’s best to first start with a sit-down meeting, the way a borrower would approach financing through traditional means. Borrowers should outline the need for the loan and the terms of repayment but don’t expect that the lender should agree immediately (if at all).

The only real perk of borrowing money from the family is that these private loans can be subject to more favorable terms and can be adjusted according to personal situations. Even if interest is being charged, terms can apply to the loan which make it fiscally easier on the borrower to repay.

These can be things like an extended grace period, elimination of interest payments or a longer-term repayment schedule. Specific clauses should be drawn up for each of these because, especially when it comes to lending money to family and friends, there are no “boilerplate” terms.

That the contract can be customized is a double-edged sword. It means the borrower and lender must think through all situations including unsavory ones where the borrower potentially defaults.

What the Law Says About Borrowing Money From the Family

When borrowing money from the family, keep in mind that there is always a tax consequence of a loan. While borrowers can’t really claim, for lenders the interest paid back is, technically, considered “income” and must be claimed during tax filings.

However, if there is no repayment, of neither interest nor principal, the sum is considered a gift and both the borrower and the lender must claim it, especially if it falls over a certain dollar value. This money is taxable on both parties. There are also some potential issues when it comes to debt recollection.

While the lending party is well within their rights to put in a clause regarding articles of breach of contract and, furthermore, can issue a debt collection letter, harassment or threats against a borrower is not legal.

Borrowing money from the family doesn’t usually come to this, but there must still be terms regarding what happens in the case that the borrower defaults. And what dollar amount should borrowers expect? Again, it varies from state and country but, typically, 18% is the maximum.

At the end of the day, a handshake is not legally collectible and if there is no contract in place, it’s not enforceable either. Remember that an ironclad contract is the only real basis for bringing any kind of action — not necessarily to financially destroy the person or even for any malicious reasons but simply to recover the money.