Starting A Business With A Family Loan
Most lenders arent willing to work with businesses that havent yet opened their doors. A popular alternative for startups are family loans.
Using a family loan to fund a startup works a lot like any other family loan. However, given new businesses are risky, you might want to draw up a business plan before you meet, which tells your family what your business is and where you see it going in the future.
You might also want to consider asking for an equity investment, instead of a loan. While you wont own 100% of your new business, you also wont have to repay the funds you borrow.
Want To Feel More In Control Of Your Finances
Our free and flexible Couch to Financial Fitness plan will help you build confidence to manage your money.
Step by step we can help you cut your spending, develop core saving muscles, and create better habits for the future.
Sign up for the MoneyHelper Couch to Financial Fitness plan
Borrowing from a family member can provide emergency money and help you avoid borrowing at very high interest rates, such as using payday loans and doorstep lending .
Are both you and the person youre thinking of borrowing from certain it wouldnt harm your relationship if you dont repay or take longer to repay the whole amount borrowed? Then this might be a good option .
However, there might be a risk that this could harm or even end the relationship if you dont repay or take longer to repay what you borrow.
Choosing Whom To Borrow From
Just because your relative loves you and your friend likes, you is not enough. Take into consideration the other persons financial situation. Dont try to borrow from someone unless youre sure they can afford it. Their sense of obligation to you might cause them to put themselves at risk. Its bad enough that youre in need. Dont put them in the same boat.
Read Also: Fha Loans In Illinois
Should You Mix Friends Or Family And Finances
Private loans between family members and friends are a convenient, flexible and cheap alternative to using commercial loan organisations such as banks or pay-day lenders.
Many people in need of a loan will first approach relatives or friends who appear to have money to spare, especially if the borrower does not have a good credit history, or is just starting out financially.
The lender may have good reasons for making the loan which are not financial, for example parents may lend their children money for university or to help them buy their first home.
How To Ask Your Family For A Loan
Asking your family for money can be a delicate situation. Before getting started, consider how borrowing might affect your existing relationships. If money is a particularly touchy subject in your family, factor that into how youll start the conversation.
Consider other options first
Exploring alternatives shows that youre serious about borrowing and not just looking for an easy handout. It can also provide an idea of what youre able to qualify for. If you find youre eligible for more competitive rates and terms than you expected, you might want to go for that option instead.
Start your search for a loan with these common types of lenders:
- Online lenders. These lenders often offer quick turnaround and streamlined applications. But rates can be higher than what youd find elsewhere.
- Banks. Already have a relationship with a bank? Some offer discounts for members, plus theyll already have an idea of your personal finances based on your bank account activity.
- . Owned by their members, these institutions tend to offer competitive rates and more relaxed eligibility. But they can take a while, and youll have to become a member to get a loan.
Make a case for yourself
Once youve exhausted non-family options, be clear that you want a loan and not a gift. Go into the conversation with an idea of how much you need to borrow, exactly how you plan to spend it and when you can reasonably pay it back. The more specific, the better.
Prepare for a no
Agree on clear terms
Don’t Miss: Bayview Loan Servicing Tucson
How A Private Home Loan Helps The Borrower
- A lower interest rate. Borrowing from a relative or friend can mean a lower-interest loan than you’d be able to find elsewhere. That’s because you and your private lender will set the rate . Because of their personal relationship with the borrower, most private lenders are willing to accept a low interest rate.
- Flexibility in paying back the money. Your loan repayment terms can be negotiated between you and your private lender. That flexibility can allow you to arrange a loan with an unusual repayment schedule at the outset or to later temporarily pause payments due to unforeseen circumstances. Just don’t get cavalier about this, or you might strain the relationship.
- Federal tax deductions. As with a loan from a bank, private loans allow you, if you itemize on your income taxes, to benefit from the federal tax deduction for home loan interest paid.
Tip : Put The Terms In Writing
You can use a legally binding and easy to fill out loan agreement, called a Promissory Note, to capture the details of your loan. Of course, its easier, and emotionally gentler, to have a spoken promise between friends, but the trouble comes when one or both of the parties can’t recall the terms a year or two in the future. A written agreement averts an uncomfortable debate later.
Also Check: Usaa Auto Refinance
Interest Rate On A Family Loan
While there is clear wisdom in setting a repayment schedule, the idea of taking interest from a relative clashes with the very familial impulse that may have motivated the loan in the first place. Doesnt family exist outside of the domains of the marketplace, capitalism, and profit?
Somewhat surprisingly, interest on family loans may be best thought of as a necessary evil.
First, theres the issue of fairness: by advancing a sum of money to another person, the lender-family member is forgoing potential interest earnings. This is the opportunity cost of making a loan. Charging interest offsets this loss.
How much potential income is lost by making a loan to a family member? While current bank interest rates are near historic lows, the somewhat-riskier stock market has yielded big returns for investors large and small. Whats more? Investing in the markets is often less risky than extending credit to a son or cousin. Though you may not recoup all foregone investment income, charging some interest is fair.
The more critical issue involves taxes. If you make an interest-free loan above the IRS gift threshold currently set at $14,000 you will incur tax liabilities. Setting an interest rate above the modest Applicable Federal Rate or AFR that is dictated by the government prevents this.
Though states also set statutory maximums on interest that can be charged on loans, these anti-usury limits are irrelevant in most family-lending situations.
How To Help Family Or Friends Without Being Their Lender
The truly valuable part of finding non-financial ways to help is that it leads to a meaningful conversation about what the problems actually are that are leading them to need to borrow money from you. Finding non-financial ways to help actually builds relationships rather than putting them at risk, as lending money often does.
Don’t Miss: Usaa Auto Loan Eligibility Requirements
Family Loans That Are Really Gifts
Some people may think they can give large amounts of money to their children and call it a loan to avoid the hassle of filing a gift tax return.
The IRS is wise to that.
The loan must be legal and enforceable. Otherwise, it may be deemed a gift.
Fortunately, its easy to make a loan legal.
Write a note that shows the loan amount, when it will be paid back, the rate of interest, and any collateral or security.
Both parties should sign the note, and keep a copy in a safe place.
For large loans or ones attached to real estate, seek legal counsel to make sure youre taking the right steps.
Prioritize Your Loan Payments
Whether you’re borrowing money from a bank or a loved one, making your payments on time should be a priority. Again, your loan agreement should outline how much you’ll be repaying each month and when. Treat this as a regular line item on your budget. You can even consider setting up automatic monthly bank transfers so that it’s out of sight, out of mind . Alternatively, your friend or family member may prefer a check or to be paid with an app like Venmo or PayPal.
If you hit an unexpected financial hurdle along the way, be upfront with them as soon as possible, especially if they’re relying on your monthly payment. Your willingness to find a solution and right the ship quickly may be enough to keep the relationship intact.
Don’t Miss: Average Apr For Motorcycle
How To Lend Money To Family Or Friends
When you lend money to family members or friends, you must first consider how you preserve the relationship. This is especially vital when youre lending money to relatives.
You can do this by discussing the loan terms in full detail before you bring out a single penny. If any of the parties have spouses, involve them in the discussion.
You must discuss every detail of the loan. Dont assume that the other partys view on finances is the same as yours.
Talk about worst-case scenarios and how youll proceed from there. If youre using family money, talk to your family about it. You can know more about family conversations on family money by checking out the resources from Jasdeep Singh.
After you discuss every single detail with the borrower, sign the agreement. From here, you can now hand over the money you loan.
Question: My Son Is In Default On Our Intrafamily Home Loan Must I Foreclose
I loaned my son over $300,000 with which to buy a home. He recently lost his biggest client, and couldn’t make last month’s payment to me. We’re past the grace period. I know it’s not his fault, and I really don’t want to foreclose. Then again, I want to get our agreement back on track , and keep my own finances clear.
Do I have any good options? Will this require scrapping the old promissory note and signing a whole new one?
Recommended Reading: Refinance Usaa Car Loan
When Should I Consider A Family Loan
Loans between family members can be risky. Before any money changes hands, think about putting these conditions in place.
- Loan terms: The borrower and lender ideally should agree on a repayment schedule and an interest rate before making a loan. Loan terms should be put into a signed contract.
- Legal remedies: If the borrower defaults on the loan, the lender has to decide whether to sue a family member or to absorb the financial loss. If you cant afford to lose the money, it may not make sense to lend it.
- Restrictions on use: For example, down payment funds from unsecured loans including family loans in some cases arent considered valid sources of funding for a mortgage down payment. So if a mortgage down payment is the reason for a family loan, youll want to think twice.
If Youre Hoping To Borrow Come Armed With A Payback Plan
Look, just because potential lenders should think of the loan as a gift doesn’t mean borrowers should treat it as such. When you ask someone you love and trust to give you their money, it’s a sign of respect to present a thought-out repayment schedule. “Do all the hard work for them,” says McCoy. “Have a real conversation about how the loan will get repaid and when. Once you start talking about money, it only takes about five minutes for the conversation to become less awkward, and you can talk about it like the numbers on paper that it really is.”
Putting the loan terms in writing can go far to promote peace of mind and reduce resentment. Draw up a contract, suggests Hendershotteither make a Word document or download a promissory-note template specific to your state . Make sure the contract includes the names of the people involved, the loan amount, the payment schedule, and the interest rate . Including an interest rate shows that the loan is not legally a gift, which can be subject to gift-tax reporting. “The document should be signed and copies kept by both parties,” says Hendershott. “It’s a way to officialize the transaction and put it in the business, rather than personal, realm.”
Also Check: Auto Refinance Calculator Usaa
Organise An Official Payment Arrangement
Setting up an official payment plan is just as important as getting a written agreement and should be included in the written agreement. Decide how the payments will be made, when the payments should be made and what kind of late fees there will be. Its up to you to decide if late fees are necessary but again, youre taking on the risk of loaning your own money. A cheque, PayPal or an automatic bank transfer are your best options. If you decide to go with cheque make sure you keep a copy of them just in case there is a disagreement about past payments.
Lending money is serious business and should be though about carefully before a decision is made especially when best friends and close family members are involved. Treat the deal seriously and follow the same precautions that a more traditional lender would and your transaction should go as smoothly as you hoped.
Rating of 3/5 based on 11 votes.
Preserving The Family Relationship
Before you decide whether to move forward with lending money to or borrowing it from family, discuss the loan in detail. If either the borrower or lender is married , both partners need to be involved in the discussion. In addition to the borrower and lender, think about anyone who is dependent on the lenderchildren or other relatives under the lenders care, for example.
Theres no such thing as being too detailed in these discussions. Its easy to assume that others view finances the same way you do, and thats not always true. Its better to have a few difficult discussions now than to risk permanently damaging the relationship.
Don’t Miss: Www.upstart.com/myoffer
Question: Getting A Family Loan: How Do I Show Preapproval To Home Sellers
My wife and I are planning to buy our first home. While I have a job, the pay isn’t great, and no bank will lend me enough to afford a home that fits our growing family. After expected twins arrive, my wife plans to stop working. Fortunately, my parents have been disappointed by how their other investments are performing, and are happy to lend us the full amount needed to buy, at a modest interest rate.
Here’s the issue: We live in a competitive real estate market, where we face bidding wars with other buyers. I think we’re in a strong position, given that we can waive the financing contingency, but it seems like home sellers all want a mortgage preapproval letter from a bankand we don’t have one. What can we do?
Why Lend Money To Friends Or Family
The average American family has a consumer debt of $32,838. That already includes auto loans, credit card debt, mortgages, and student loans. Add to that the taxes and insurances taken from your pay and anybody will feel like theyre on a sinking ship.
When a person cant afford to be in any deeper debt to a bank or lender, what does he or she do? If he can, even if he doesnt want to, he turns to his family or friends for financial help. Some are more than willing to help out while others may need a little more convincing.
Still, who better to help them than family members? Who else can they turn to and trust wont judge them than their real friends? They trust that youll give them the benefit of the doubt when strangers wont.
However, you must keep your eyes open and wallet before loaning money to people you know.
Read Also: Ussa Car Loans
Coronavirus Makes Family Loans More Complicated
In normal emergency situations , borrowing from family or friends is often a good option vs a traditional lender, says McCoy. But family loans work best when theres a clear timeline of financial recovery and therefore repayment. With the coronavirus, that timeline can be hazy.
The thing is that no one knows when is going to end, says McCoy. And waiting indefinitely for a friend or family member to pay you backas I learned when I loaned my boyfriend that $2,500can strain the relationship.
Instead of asking for a lump sum to patch up income loss during the pandemic, McCoy recommends brainstorming other, more sustainable forms of help.
Consider moving in with your parents or a sibling, or selling your car and asking a friend or family member to carpool or drive you to work for a while. Those solutions could have bigger, longer-lasting impacts than a one-time check, McCoy explains. Plus, they help you avoid getting into debt you might not be able to pay off.
Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.
