How to Make Family Loans Work

How to Make Family Loans Work

One of the best loan options available is to borrow from a friend or family member. If you need to get say a loan for 2000 or even several $5000 loans it can be a great option. This option is usually especially if you don’t have good credit, no credit history, or just the lowest payment possible. However, money has ruined more than one relationship. In order to make the loan beneficial to both parties you need to be sure and cover some basic steps.

First – be reasonable.  Don’t just assume the person you’re asking will say yes. Make sure that it’s not going to strain their finances to give you the loan. Going for the pushover could cause resentment. Do a little preliminary research and decide both who would be most likely to say yes, and who is most likely to be able to accomodate the request financially

Secondly, have a contract. Draw up a document, preferably a legally binding one that stipulates the conditions of the loan. The loan amount, the expected repayment period, the interest rate, the amount of monthly payments, how those payments will be made (check, automatic deposit etc), any penalties for not making payments on time, for making insufficient payments etc. It is best to treat a friend or family loan exactly as you would a bank loan, keeping in mind that the consequences for repeatedly missing a payment can be much more severe – the loss of or a strained relationship which you value.

If you stick to these stipulations this type of loan can have numerous advantages. You will most likely get a very inexpensive interest rate, or possibly no interest rate depending on the amount of the loan. If the loan is a large amount though it is best to have a minimal interest rate to cover the cost of inflation. The loaner will also be more forgiving if an extenuating circumstances makes a payment late.