How to make loans to family and friends less awkward
What do you do when a friend or family member asks you for a loan? Almost nothing is more awkward. But for some people, a personal loan is their only option, now that big banks are rejecting loan applications and credit card requirements are tightening.
But don’t believe everything you hear. You can help someone you care about who’s in need without putting yourself in a bad situation. Just take a few precautions:
Check your debt
If you have debts to pay off yourself—particularly high-rate credit card debt—now is not the time to start shelling out cash. Same goes for retirement. I don’t care if you’re 25 or 55: Make sure you’re socking something away for your future before coming to anyone else’s rescue.
Make it official
Okay, a legal document among friends can seem a little weird at first. But trust me: In the end, it might be the thing that ensures everyone remains friends. Download a promissory note—an agreement that you’ll be paid back in full—at Nolo.com. It also allows you to specify payback terms like installments and interest. And speaking of interest…
Try to keep the IRS happy, too
If you’re loaning more than $14,000 (or $15,000 in 2018) the IRS expects you to charge at least some interest—a very small percentage called the “applicable federal rate” (AFR). It changes monthly, and you can always find current rates here. If you don’t charge interest, you may owe tax on the money you would have earned had you charged the AFR.
Be willing to part ways
Even if you take all these precautions, when you loan money there’s always a chance you’ll never see it again. If that’s not OK with you—financially or otherwise—rethink this decision.
What’s your take? Would you loan money or ask someone for a loan?