A family loan agreement is a loan between members of a family. You can loan money to another member of your family if they need it. The purpose of the loan doesn’t matter and this loan doesn’t require the services of a credit union, bank or any other lending institution.
- 1 Family Loan Agreements
- 2 What is a family loan agreement?
- 3 What to consider before loaning from a family member?
- 4 Family Contract Templates
- 5 How do I write a loan agreement for a family member?
- 6 How much money can you loan a family member?
- 7 Personal Loan Agreements Between Friends
- 8 What is the minimum interest rate for a family loan?
Family Loan Agreements
What is a family loan agreement?
The family loan is an agreement carried out between relations by marriage or blood, wherein one party acts as a lender and another party, the borrower. Generally, the one borrowing money has to pay an interest rate. As a lender, include the interest rate in your family loan agreement template to make things clear.
What to consider before loaning from a family member?
Lending money to one of your family members can become a very daunting undertaking and because of this, it is essential to be very clear by creating a family loan agreement. Before you consider creating a personal loan agreement between friends or family, here are a few things to consider:
- Does your family member have any other options?
First, you must determine what the issue is. Ask your family member if there are other ways by which you can offer help aside from providing financial support. Only offer or agree to a loan if there isn’t any other option.
- Are you ready to lose the money?
If you decide to lend money, make sure that you can afford to lose it. Never go out of your way to break the bank, especially when you have saved your money for an important purpose, like college tuition.
- Set your expectations and be very clear about these
If you decide to push through, draw a formidable loan schedule and payment plan that works for you. Look at different family mortgage loan agreements for reference. If your relative doesn’t agree with your terms, you don’t have to lend them money.
Family Contract Templates
How do I write a loan agreement for a family member?
Many consider a handshake between members of the family as an enforceable contract. But for the IRS, they assume that money transfers made between members of the family are gifts unless there is proof that comes in the form of a family loan agreement. To ensure the legality of your loan, consider the following steps:
- Come up with a schedule for repayment
Use a family contract template that includes a repayment schedule. The best solution to this kind of loan is to set up a clear schedule to avoid any misunderstandings or disputes in the future.
- Set and interest rate
The IRS sets the minimum interest rate known as the “Applicable Federal Rate.” This rate may vary depending on the duration of the loan.
- Put your agreement in writing
It is still recommended to put your payment terms and schedule in writing. This gives you a concrete document that shows your expectation that the borrower will pay back their loan.
- Keep payment records
You should keep a record of all of the payments the borrower makes. This helps you keep track of the loan’s remaining balance. One advantage of good recordkeeping is that it helps with the taxes and keeps you and the borrower on the same page.
Tax rules regarding loans and gifts can get complicated. If both parties or either party isn’t sure of the tax implications of family loans, it’s best to seek the advice of a tax professional.
How much money can you loan a family member?
This depends on you as a lender – how much you’re willing to loan and how much your family member needs. Always remember to treat a loan to a family member like a business transaction.
This ensures that the loan process won’t ruin your relationships. Apart from creating a family loan agreement, here are other things to remember when lending money to family members:
- Don’t expect too much
Although this sounds alarming, it’s always better to keep your expectations low – this means that you shouldn’t expect your money back. Have a mindset that says, “I might not see that money again.”
Of course, this doesn’t always mean you won’t get your money because you still trust your relative. But with low expectations, your loan isn’t repaid, you won’t feel as bad.
- Expect that the repayment of your loan will take time
The dynamics of loans change when you have a family loan that has no “legal” obligations attached to it, The main reason why family members seek loans from family is that they cannot get this elsewhere.
Should they get a loan from a financial institution, they would have to pay very high-interest rates and they would have to repay the loan faster.
- Try not to keep secrets from each other
If you plan to lend money to a relative and you’re married or in a relationship where you share a bank account with your partner, make sure that your partner knows about your decision to lend money.
Taking out money from your account might put a strain on your savings and your relationship. Always involve your partner when making important decisions like this.
Personal Loan Agreements Between Friends
What is the minimum interest rate for a family loan?
Putting an interest rate on money loaned to a relative might clash with family values and relationships as the transaction looks like a business deal, just like in the case of a parent to child loan agreement. But sometimes, there is no other option than to borrow from a family member.
But when you advance a sum of money to a family member, you’re already foregoing potential earnings from the interest. This is the opportunity cost of making a loan. When you charge interest, you offset this loss. Of course, even if you’re loaning to a member of your family, you can still charge interest.
When it comes to family loans, the more critical issue in this situation involves taxes. For instance, if you make an interest-free loan above the gift threshold of the IRS, you will incur tax liabilities.
But if you agree on a loan and set an interest rate higher than the “Applicable Federal Rate” set by the IRS, you can avoid this. Some states also set statutory maximum amounts on the interest that you can charge on loans, although these anti-usury limits are not relevant in most situations that involve family loans.