Should you lend money to friends or families that are hurting financially?
Many of us have a hard time denying this request from a loved one. It’s not wrong to want to help someone in need but do so without destroying your own finances. Before you consider making this loan — reflect on the following:
- The financial needs of you and your immediate family must come first.
- Keep in mind lending to friends and family may lead to conflict.
- Be sure to put the loan amount, interest rate, due date, late fees and the course of action to be taken if the recipient defaults, in writing.
- The above documentation should be notarized in the case of default.
- Consider how this individual got into financial trouble. Will this loan help them get back on their feet or will it continue to enable poor financial habits?
- Do consider tax implications. The IRS requires family loan rates to reflect the current commercial loan market. If your loan is given with no interest, you may be required to pay gift taxes. If you’re lending more than $10,000 consult a tax professional.
- Don’t lend money if you can’t afford to lose it.
- Do involve your partner or spouse in the decision to loan or not to loan.
Offering to help can cause some unforeseen obstacles. Addressing as many of these complications from the start can help you make a more informed decision and preserve your relationship throughout this process.
Answers from AZ