Lending money to a family member could be a beneficial thing, or it could harm your relationship with that person for many years. The odds are that the relationship will get damaged permanently. Some financial experts advise that you should only lend money to a relative if you are willing to sue that person. While that guidance might sound harsh, you should protect yourself from adverse tax consequences and losing the money forever.
A New York real estate attorney can help you answer the question of whether you should loan money to a family member and prepare documents to make the loan enforceable in court. Having an uninvolved third party provide guidance can remove the emotional aspects of the decision.
Here’s What You Should Know When Lending Money to a Family Member
Here are five things you need to know if you are thinking about lending money to a family member:
- Do not lend more money than you could afford to give outright to the person. You might want to consider making a gift instead of a loan. A gift reduces the possibility of harm to the relationship that can happen with a loan, but you should check with a lawyer about how to avoid gift tax problems.
- You will feel taken advantage of if you lend money to a relative who does not pay you back. The hurt will be greater if the person has the ability to repay the loan but does not. You helped this person when he said he needed your help, yet he does not care about your financial situation.
- If the relative does not have the credit rating to get a traditional loan from a bank or put the item on a credit card, then those entities do not think he is likely to repay the loan. Banks and credit card companies are in the business of extending credit and lending money. They have far more information about your relative’s finances than you do.
- Lending money to a relative can cause problems with other relatives as well. Let’s say that your niece borrows money from you for a down payment on a car. If she does not repay the loan, things could get awkward between you and your sibling, who is the niece’s parent.
- You can experience marital issues if someone on your side of the family borrows money. Your spouse might be angry if you did not talk about or agree on the loan. Your spouse might have had other plans for that money.
You could avoid some of the risks of lending money to a relative if you both sign a formal loan document that spells out all of the essential terms of the loan. You should include:
- How much money the person borrowed.
- The exact date on which payments will start.
- The repayment schedule with precise amounts of monthly payments, and the day of the month on which they are due.
- What will happen if the person misses payments, pays late, bounces a check, or defaults on the loan.
- The date by which the loan must get paid in full.
- The interest rate the person will pay you. You might have to pay gift tax to the government if you do not charge interest.
One final tip: if your relative balks at signing a legally-binding loan document that you could enforce in court, he likely did not intend to repay the money he wanted to borrow from you.
Contact us today. Our New York real estate attorneys can help protect your interests if you are planning to lend money to a relative.