With banks tightening their lending terms, more and more American are likely to consider turning to family for loans. While this might be the right solution for you, it is good to consider whether or not it makes sense for your situation.
First, can the lender afford to do so? If the answer is no, move on. It doesn't make any sense to have one family member put themselves out there to support another if it means making their own situation more precarious.
Second, consider existing relations with this family member, or perhaps friend. If you've faced any conflicts in the past then adding money to the mix is only likely to make things worse and bring up old issues. At the same time, if you've had excellent relations with someone, now is not the time to start, and money can often be a difficult area to navigate.
Next, it must be made absolutely clear what the terms are. Just saying that it will be returned at some point puts everyone in a weak position. Spell it all out and put it in writing. In fact there are several good websites which allow you to generate loan agreements - check out Virgin Money for one example.
Keep in mind as well the reduced likelihood of being paid back. 14% of loans default when they are generated by family members, whereas only 3% default with standard consumer loans.
If you've both thought it through and it seems to make the most sense for you, then we wish you well in handling the process smoothly.
Readers: We'd love to hear if you have any experience with family loans.
Cheers,
Miel
Wikinvest Wire
4 comments
When we bought our home, we borrowed $9500 from my father in order to not completely deplete our savings account and cover some of the larger closing costs like the property tax escrow. We set up a plan that each month we would pay back $300. My father didn't have a problem loaning us this money and we've proven ourselves to be very responsible with money (particularly since we saved almost $80,000 for our downpayment and have never carried a balance on any credit card).
I would lend money to my children who were in similar situations, but if they had proven themselves irresponsible with money, I would only loan them what I knew I could afford to lose.
Only if you Are going to pay it back!
I only loan money to my parents, who have loaned me money many many times over the years. For instance, I borrowed 5k from my dad for closing costs in 2003. We paid him back in 8 months. Thius year my dad bought an investment property and wanted to pay all cash. We loaned him 10k and he paid us back within 3 months.
On the other hand my brother borrowed 2k from us in 2004 and we are yet to see a dime back from him.
After a few bad experiences I feel the only people I would loan to or take a loan from is our parents who are good with money.
For friends who are down and out we usually just give them a little gift if we can afford too. No reason to loan money and ruin a friendship.
We don't loan anymore than we are willing to lose if we don't get it back. Additionally, once it's loaned, we just consider it gone. If we get it (all or some) back, great. If not, that's the thought process we had when we loaned the money, so all is well.
Post a Comment