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Six Things to Remember Before Lending to Family


Act as any lender would.

Lending among family members is more common in hard economic times. If you're ready to act like a Citi (C), Chase (JPM), or Bank of America (BAC), here are some things to consider before making a loan to a relative:

1. Document the loan

Advisers say spelling out terms like the interest rate, the payments expected and the length of the loan helps avoid problems because everyone involved will understand what's expected.

2. Make sure you charge a reasonable interest rate

There can be tax implications for both sides if the loan is interest-free or too low.

3. Include a late payment penalty.

Knowing there's a consequence for not making a payment on time increases the sense of responsibility for borrowers.

4. Don't lend money you can't afford to lose

Because repaying a family loan is often treated as a low priority by the borrower, lenders should be extra-cautious about using funds they'll need for future living expenses.

5. Don't hesitate to check income and credit history

There may be a reason the borrower can't get credit elsewhere, and the lender should know that before handing over the money.

6. Consider using a company to collect the payments or a peer-to-peer lending site

Having a third party collect and distribute the payments can take the emotion out of the deal and make it seem more businesslike.

See also: Sign Here: How to Seal a Deal with Family and Friends and All in the Family

Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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