It is really hard to deal money when it already involves the family. It is surely difficult to keep transactions strictly business.
Lending and borrowing money from a bank follows procedural guidelines that have evolved over centuries. Personal lending, that is making or taking loans with friends and family, has been going on for just as long, but firm guidelines haven’t developed because each circumstance is unique. There is, however, a way to make family loans safer and more secure for all parties involved.
Reasons Against Personal Loans
There are strong reasons against giving a personal loan to family or friends. The biggest has to do with your own personal finances. Most people aren’t really liquid enough to lose that money, and by assuming that all the money loaned will be lost, you’ll quickly realize what size of loan you can reasonably make. If you’re dipping into a retirement account, emergency fund or other necessary fund to make the loan, it’s not a loan you should be making.
Family strife, tax problems and complacency – especially complacency – are some of the other things to worry about. If your family or friends come to you for loans simply because you lend at a low (or no) rate, you are hurting your own finances to subsidize theirs. (For more on discovering your own financial worth, see time value of money.)
A loan from a bank or credit union will help them build a good credit score, as well as financial responsibility. On the other side of the coin, when interest rates begin eating away at a borrower’s paychecks, the bad habit of living outside of their budget may be broken.
The Difference Between a Loan and a Gift
The reasons against personal loans often evaporate in the face of emotional considerations, when one of your loved ones “needs the money.” In this case, you have to make a clear distinction between a gift and a loan. A gift has n