How to Write a Loan Agreement Between Family Members

Afamily loan agreement, also known as an "intra-family loan" is a certificate used whenever money is lent between two (2) family members. The certificate provides clarity for both the borrower and the lender, giving clarity as to what is expected from both parties. Lending between family can be rewarding for all involved so long the seriousness of paying back the coin is understood and the deal is washed with every bit trivial emotion as possible.

Contents

• Why use a Family Loan Understanding?
  • Benefits
  • Risks
• How to Lend to Family (4 Steps)
  • Step 1 – Weigh the Pros & Cons
    • Lending Checklist
  • Step 2 – Create the Loan Agreement
  • Step 3 – Provide the Money
  • Step 4 – Monitor

Why employ a Family Loan Agreement?

If a family fellow member asks for coin in a time of need, it may be tempting to provide the funds so long they agree to pay back the loan. I might think requiring their family fellow member to sign formal documentation could harm their relationship or make the lender come off as untrusting. In reality, requiring written documentation in the class of a loan agreement promotes greater family unity and respect more than any verbal understanding tin can provide.

Like all types of lending, lending to family members comes with its ain gear up of benefits and risks, which include:

Benefits

• Flexible terms – Different standard loans, the understanding can exist structured however the parties wish. Additionally, the lender can alter the terms of the loan to adapt changes in the borrower's life.
• Lower interest rate – Fifty-fifty if the borrower has a keen credit score, rates offered by banks don't come close to the everyman charge per unit that can be charged amid family (know as the AFR, or "Applicable Federal Rate".
• Helping hand – For family members suffering a financial crisis, the loaned money can serve equally a lifeline in a time of dire demand.

Risks

• Ruined human relationship – Although a loan agreement helps to reduce fractured relationships, verbal arguments and distrust can prevail if the borrower doesn't respect the terms they agreed to.
• Taxes – For loans over a certain value, the IRS requires taxes to be paid on the interest collected. If the lender charges an interest rate that is lower than the AFR, the lender is all the same required to pay taxes on both the interest earned as well as the difference betwixt the AFR and the interest rate that was charged.
• Missed payments – Arguably, the most obvious risk is that the borrower can stop (or refuse) to make payments on the loan. Short from taking the family member to court, in that location is little the lender tin can do to collect the money lent.

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How to Lend to Family unit (4 Steps)

Step one – Weigh the Pros & Cons

Take time to heed to exactly why the family unit member needs coin. If something doesn't feel right, information technology's probably for good reason. Even so, with all things money, removing emotion from the equation is recommended. Use the lending checklist beneath to aid in making a fair and reasonable determination on whether or not the family unit member should be lent to:

Lending Checklist

Before lending money to a family fellow member, go through the following questions to make up one's mind if they're a good fit to receive funds:

• • What would they use the money for?
  • Are they responsible with their money?
    • Are they currently in debt?
  • Have you lent to them in the past?
    • Did they pay back the loan?
    • Did they do it in a timely mode?
  • Volition loaning money crusade jealousy among other family members?
  • Would my meaning other (if whatsoever) be okay with loaning the money?
  • Are you okay with losing the loaned money?

The final point, referring to whether or not the lender would exist "ok" with losing the loaned coin, is arguably the most important question. One should not loan coin with the expectation of getting information technology back if they value their relationship with said family member. That is how family relationships are changed (for the worse) permanently.

By mentally viewing the loan equally a gift, the lender is non emotionally devastated if the loan goes unpaid. Having said, the lender should non share this with the borrower – this is merely a mindset that the lender should have prior to lending money.

Step ii – Create the Loan Understanding

Download: Adobe PDF, MS Word (.docx), OpenDocument (.odt)

The loan agreement establishes several important points regarding the lent coin. By requiring the borrower sign the understanding, it helps to ensure they sympathise the seriousness of the loan, and that they're required to follow the terms within it. It also serves as a record of the deal, letting the lender look dorsum on the terms they offered should they receive another asking for money from some other family fellow member.

At a minimum, the understanding should include the following data:

• • Loan amount ($);
  • The date the money was lent to the borrower;
  • Both the names and addresses of the lender and borrower;
  • The repayment structure for the loan;
    • Engagement of the first payment;
    • Amount ($) of each payment; and
    • Day of the week or month payments are due.
  • Whether interest will be charged (and if and so, how much involvement); and
  • The signatures of the borrower and lender.

Once the understanding is signed, a copy should be kept by both the lender and the borrower.

Step 3 – Provide the Money

The lender tin can at present provide the borrower with the amount ($) as stated in the loan agreement. This should be done by providing cash, a check, depositing the money in their bank, wiring the money, or paying for the expense directly.

Alternatively, the lender tin provide the loaned money in chunks at times the borrower needs it. This tin help to ensure the borrower allocates the money towards the expenses they agreed to use the money for. Withal, if the lender intends to do this, it must be clearly stated in the loan agreement that they intend to pay the borrower in this fashion.

Pace iv – Monitor

Once the coin has been provided, the parties should revert to the terms and weather condition as stated in the loan agreement. The lender should keep a tape of all payments, noting the time they were made, the amount paid towards interest and principal, and the remaining rest owed. If the borrower is belatedly on a payment, the lender should "bank check-up" on the borrower to see the cause. If they simply forgot (and they make the payment in full before long after), the lender shouldn't treat it as a big deal. However, to establish the importance of the loan terms, the next payment due date should remain the same – non pushed back to a later date.

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Source: https://esign.com/loan-agreement/family/

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