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Loaning Money to Family Members

Posted 6 years 88 days ago ago by Danielle Streed

When your family member asks for a loan,  should you say yes?  The answer to this question is not that simple. There are several things that you need to ask yourself first.

1. Why does your that family member need the money number ?
2. Will your financial assistance help your them in the long run?
3. Can you really afford to loan out this sum of money?
4 If something goes wrong with the loan and getting repaid, will you be able to survive financially without the payments?

When dealing with a fairly large loan to a family member there are several things you need to consider before you say yes.  In addition to the questions posed above, you need to sit down and review the loan amount with the family member. You need to know their current expenses and income. This will help you both determine if they will they be able to afford the loan repayment.  If this family member were seeking a loan from a financial institution, this same information would be asked of them. You should be no different.  You should also know the purpose of the loan.  As a “lender” you need to decide whether the loan purpose is reasonable.  Next, you need to consider if you step in to help this family member now (typically this family member cannot qualify through a traditional lending institution) will that family member continue to lean on you again and again.  What happens if you face an unexpected financial circumstance of your own, do you have sufficient funds to take care of yourself?   What if something goes wrong and the family member loses their job or finds themself unable to pay you back? Will  non-payment affect your financial condition? When it comes to loaning money to family, you  need to document the loan in either a contract format or as a promissory note.  You need to spell out the loan amount, the interest rate and the repayment schedule.  You also need to identify whether this loan will be forgiven at the time of your death or if it will count against that family member’s share of your estate.  As you can see, there are many issues that need to be addressed when a family member asks you for a loan.  Your answer should not be yes until you have answered many of the questions posed above.  

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