Lending to Family
The good, the bad, and the ugly. During the trying times we are hearing from a number of clients asking about either borrowing, or loaning money, to a family member. The questions cover everything from personal loans, so a child or relative can get by, to business loans to assist a relative with a new or existing business. One of the things I have learned over the years is that these loans can be a blessing or a curse – and sometimes both.
Because of our experience in this area over the years we have developed a few rules that we want to share with you.
- Never loan more that you can afford to lose.
- Never borrow money to loan to anyone.
- Don’t jeopardize your retirement or home to make a loan you can’t afford.
- If you choose to loan to a relative, ask yourself which you would choose if things go bad
- Take your losses and forgive the borrower OR
- End your relationship and avoid your family member going forward
- Get everything in writing! This includes the term of the loan, interest rate, payment terms, and what, if any, security will be provided.
- Document the transaction with a written note, security agreement, and UCC filing.
- Don’t ignore missed payments. If you are the borrower be sure to communicate any issues that will delay you in making expected payments. If you are the lender and a payment is missed communicate with the borrower to find out why.
- Speak to your professional advisors before you decide. If you are afraid they will talk you out of doing the transaction it’s even more important that you speak to them.
- Don’t allow yourself to be rushed.
In most cases the reason a family member is looking for a loan from another family member is that they have few, if any, other options and the loan will be high risk and low reward, other than the gratitude of the family member that needs the loan. These loans can often turn into a wedge between family members if things don’t pan out, payments are delayed, or the loan must be written off.