Many people frown on lending money to family. Doing so runs the risk of hurting otherwise good relationships. In this MSN Money article, Liz Pulliam Weston talks about how to lend or borrow money from family while avoiding the pitfalls. When lending money to family, heed this advice:
* Be clear that you expect to be paid back. The borrower should understand that this time, the money is not a gift.
* Get good tax advice. There are important considerations whether you charge interest on the loan or not.
* Draw up a contract. No reason to buy anything, although the article recommends purchasing a contract from Nolo Press. Any written statement with the loan’s terms signed by both parties is sufficient.
* Don’t lend money you can’t afford to lose. There’s always a chance that the borrower won’t be able to pay back the money. If that’s the case, it could end up ruining your relationship.
On the personal side, when I was shopping for a car, I was prepared to get a slightly used Civic and save some money. The plan was to pay cash, as well. I was car shopping with my father at the time, and after looking around we decided that the price difference at the dealers between slightly used and new was comparatively small, but enough to bring the price up to a point where I’d have to liquidate my entire savings.
My father strongly suggested that I get the newer car. In order to keep the transaction with the dealer cash-based, he would pay for it and I would pay him back. This way I wouldn’t have to dip into much of my savings. So that’s the path we chose. I pay him back every month at 2% interest. I think it’s a pretty good deal.
Updated May 17, 2011 and originally published April 7, 2005.