Obtaining a Loan from Family

Borrowing money from a family member: does just the thought of it make you uneasy? Everyone has heard the horror stories of what can happen when money and familial relations mix, but these unfortunate tales and few and far between. The truth is that turning to a family member for a loan sometimes makes a great deal of sense. You just need to be cautious and professional with how you proceed.

The benefits of obtaining a loan from a family member instead of a traditional lender, such as a bank, are numerous. Even if you have been using the same local credit union for years, for example, your family members still know you better (and hopefully trust you more) than anyone else. This certainly should translate into more lenient loan terms and better interest rates.

A family member also might agree to provide you with a loan when you otherwise would have a difficult time obtaining one through another lender. This might be because you have a less than perfect credit history and/or because you cannot obtain the loan that you need without a co-signer. Family loans certainly can fill in such gaps, but of course you want to protect your family member’s finances above all else.

If you are considering asking a family member for a loan, then engrain one necessary factor into your mind before you do anything else: treat your lender and your loan exactly the same as you would if you had a bank loan. Proceed professionally, and take all necessary steps to protect both you and your lender from financial, as well as personal, problems.


Asking for a Loan

If you are going to ask a family member for a loan, then your first big decision is which family member to ask. A parent is the most common choice, but consider everyone’s true ability to lend before you ask. Frightening as it may be, it is crucial to consider how the worst case scenario would effect a potential lender. If you are unable to repay the loan, would your lender be able to afford this setback? What would happen to your relationship if you are not able to pay as soon as you hope?

Do not plan to ask anyone for money while fully expecting them to say “yes”. It has to be ok for a family member to deny your request, and if it is not then you should not ask a family member. There may very well be issues in others’ lives that you do not know about, financial or otherwise, that may cause them to deny your request. Undoubtedly, having to turn down a family member for monetary assistance is a difficult position in which to be, so if someone tells you “no” do not make the situation any more uncomfortable than it already is. A bank can deny your loan request, so a family member should be able to also.

Really consider the outcome of your loan situation before deciding on a family member to ask. For example, how might your relationship with your parents be altered if they once again are in a position of authority over you? It is a very wise idea to share any family loan agreement with others who might be affected, such as siblings. Your agreement should not be secretive. No matter how professional you try to keep your arrangement, with family comes emotional ties, so safeguard against misunderstandings and hurt feelings as much as possible.

When you decide to ask someone for a loan, explain to that person exactly why the money is necessary. Be up front about any financial troubles you have had in the past, and why you feel that he or she is a better lender choice than a financial institution. Your potential lender deserves to know this information.


Setting up a Loan

No matter how close your relationship with the lender, make sure to have your loan agreement completely in writing. This is not only to protect the both of you if a disagreement or complication arises in the future, but also for legal and tax purposes.

If your loan is less than $10,000 and if your agreement is quite straightforward, then simply stating the terms and conditions of your agreement in a letter signed by you both probably is adequate. If it is above this amount, then there are legal and tax considerations brought into the agreement, and you should work with a lawyer to devise a contract or promissory note.

When deciding on your loan agreement, be open and honest about the size of payments that you feel comfortable making and about how long you would like to repay your loan. It is best for the two of you to develop a repayment plan together, so that both parties have their needs met.

If your loan is quite large, then you might consider attaching some type of collateral to your loan to protect your lender in unforeseen circumstances. Suppose you become sick or injured, for example, and cannot afford to repay your loan. In this case, your lender could obtain your car or some other property to sell for repayment, so that his or her finances are not ruined in such unfortunate circumstances.

Conclusion

There is nothing wrong with taking out a loan from a family member so long as all transactions are done as professionally and cautiously as possible. In fact, there are situations in which borrowing from family might be the best solution to one’s financial problems. Just understand how your loan potentially could affect your relationship if you are not careful, and be completely open and honest with your lender.