Should You Make a Personal Loan to a Family Member?

[Oct 30, 2009.]

 

Many families are pulling together to help each other out during these tough financial times. But sometimes giving financial help to a relative can damage the relationship. Here are some things to consider before making a loan to a family member.

Is the Money a Loan or a Gift?

The first question anyone should ask is can they actually afford to give a relative money? Many times people have good intentions about helping family members but really can't spare the money. Second, he or she should decide whether the money is being given as a personal loan or a gift that doesn't have to be paid back. Establishing this upfront will avert any tension and misunderstandings later.

Personal Loan Documentation

If the money is to be a loan, there should be some kind of written agreement to document the transaction. At the very least, there should be a contract that states who gave and received the loan, the amount of money, and the terms of repayment. Both individuals involved should sign and date the contract.

Loans Via Social Lending Sites

For those who want a more formal agreement, Virgin Money can help set it up. For $99 the site allows people to properly structure a loan promissory note and repayment schedule. The loan can be set up with an amoritized or interest-only repayment schedule. It's up to the individuals to agree on the terms of the loan, and Virgin Money does not actually loan any money.

Dangers of Co-Signing for Loans

In some cases, people may be asked to actually co-sign for a personal loan. This may make sense for parents who have college-aged kids who need help with education expenses. But in most cases, co-signing for a loan is a bad idea—even for a relative. Think about it this way, if the individual already has bad credit, never pays his bills on time, and/or has already defaulted on other loans, it's logical to assume that he may also stop paying on a loan from a family member. Think long and hard before being talked into co-signing any loan.

Relationships are More Important than Money

Whenever someone loans money to another person, it's important to discuss both parties' expectations before money has changed hands. Many people who thought they had a rock solid relationship have ended up angry and estranged over loans that were never paid back. Ultimately, preserving a relationship with a family member should take precedence over money.

 

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.