Holistic Survival
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The quicksand of lending to relatives.

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iStock_000004322878Small Money GiftWhile some people are still doing fine financially, others are hurting. There’s no doubt about that. In these uncertain times, it can become tempting to make an informal personal loan to an adult child looking to buy his first home, a struggling relative who’s lost a job, or a sibling in trouble with debt.

We’ve all heard horror stories of lending money to family but how much of the criticism is deserved? The more important idea to recognize is that lending to family is a growing trend – growing in a BIG way. While it’s hard to track all the money changing hands, at Virgin Loan, an online company that facilitates these kind of transactions, volume has more than doubled in the past two years – up to $425 million.

So should you just hand over a check for twenty grand with a pat on the back and a handshake? It might be better to make it a bit more formal. Try these ideas on for size.

1. Check your bottom line – If the whole deal goes bad, can you afford to lose the money? And be sure that you won’t lose a cherished relationship in the process.

2. Set the terms – Yes, the IRS does care what you’re doing. Don’t lowball the interest rate because there are certain guidelines set up for this sort of deal. You know they’re going to expect you to pay taxes on interest income, right?

3. Put it in writing – Whether you download a do-it-yourself promissory note or have a third party make it official, get it in writing. Establish a paper trail so there are no misunderstandings, and it’s always a good idea to give the IRS a paper trail to follow.

But our best piece of advice might be this. Think of money loaned to a family member as a gift. You’ll sleep better at night. If you get it back, fine. If you don’t, no hard feelings. If you aren’t in the right frame of mind to do that, DON’T LEND IT!

The Holistic Survival Team