By: Jennifer Chang
With creditors charging larger interest rates to loan money, and banks offering less returns on investments, borrowing/investing from family members has become more and more popular. Yes, it is harder to track money borrowed by family, in some circumstances, the advantages outweigh the risks. For example, Brian Hetherington, a home owner, was paying a 7% interest on his mortgage, while his father, Jim Hetherington, had the money but was not earning any return on that money. So Jim lent the money to his Brian at a lower interest rate. This way, Jim earned a return on his money, and Brian was able to borrow money at a lower interest rate.
Mixing family with money can be tricky a lot of times. If you are thinking about lending money to family, here are some tips. First, make sure you can really afford to lend the money and that the loan won’t affect your relationship. Clearly state the terms of the loan; 27% of people who lend money to their family don’t get repaid mainly because the terms of the borrowing had not been defined. Another thing to remember is to keep a paper trail, both for tax purposes and for your own. Having a written statement emphasizes that this is a business transaction, not a personal agreement. Last but not least, don’t lend money out of guilt. Always use reasoning to determine if lending the money is risky or not.
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