Six Things to Remember Before Lending to Family
Act as any lender would.
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
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