Loaning money to a family member is often considered a bad idea. It can lead to family disagreements or rifts if the recipient defaults on the loan. Getting everything in writing is essential if you expect to get your money back. If you don't draw up a contract for the loan, there may be arguments or hurt feelings, and you may never see your money again. Carefully consider the arrangement before agreeing to loan money to family members.
Set the terms of the personal loan agreement. This includes the loan amount, interest rate, repayment schedule and penalties for breaking the agreement. Make sure both parties understand and agree to the terms.
Consult with a tax professional on the loan agreement. Check on potential tax implications for either party resulting from the agreement. If you aren't comfortable with potential tax problems, reconsider the terms of the loan.
Draw up a formal contract if the loan details are acceptable to all parties involved. Using a lawyer is a good idea if you plan to loan a large sum of money to a family member.
Plan for a situation where the borrower is unable to pay back the family loan. Decide if you will refinance the loan, change the terms or forgive the remainder of the loan.
Keep the lines of communication open with the borrower. Not talking about the loan, particularly if the borrower has difficulty paying it back, can cause resentment and tension.
The Virgin Money website (see Resources) offers a more formal way to set up what it calls a "social loan" to a family member. Virgin charges a small fee and allows you to set the terms of the loan. It writes up the loan paperwork to make it official. This gives you more security when lending money. Only lend an amount of money you can afford. Ask yourself if you can live without the money if the borrower isn't able to repay it. Go into the agreement with clear expectations from the borrower. Let him know you expect the money back. Some people feel they can get away with missing payments or not paying back the loan at all if it comes from a family member.