Need a Personal Loan? Try Asking Family and Friends

[Nov 24, 2008.]

 

Lenders have gotten more strict with who they'll lend to so more people may start turning to family and friends to get personal loans. People of all income levels can participate in such deals, which can allow people to obtain large and small personal loans to pay for a home, car, or college expenses.

It's important to have a formal agreement of any personal loan between family members, states a CNN Money article. This will help keep everyone on the same page as far as the expectations for the financial transaction. Loan documentation should include a promissory note that details the amount of the principal, interest rate, and repayment schedule.

Small personal loans between people who know each other well are likely to be unsecured. But if you're borrowing a large amount of money, your friend or family member may want some kind of collateral. The loan agreement should specify if any is collateral involved.

Having documentation can also satisfy the Internal Revenue Service (IRS) that the transaction is a loan and not a gift. Interest rates on personal loans should be at or above the Applicable Federal Rate, which is set by the IRS each month. The person lending the money will owe taxes on the interest they receive.

If the money is a gift, the person giving it can exclude up to $12,000 per person from the federal gift tax. That figure will rise to $13,000 in 2009.

One of the most important things to remember when you're deciding whether to make a large or small personal loan to a family member is whether or not you can actually afford to part with the money. Make sure your financial situation is stable enough so that if you don't get the money back it won't send you into financial ruin—or cause hard feelings.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.