Feb 02 2010
The Family Bank
Few people like talking about it.
Fewer admit doing it.
But as the jobless recovery grinds on, more people find that they have no choice but turn to family members for financial help. A December New York Times/CBS poll revealed that out of the 700+ people surveyed, over half had borrowed money or requested some other assistance from family or friends.
Swallowed pride, eating crow, loss of independence–whatever you want to call it, asking siblings and parents for help is not easy.
After all, it’s one thing for a newly-graduated, 20-something with college loans to move back with Mom and Dad. It’s another when the mid-career, almost 40-something, moves back in. And let’s not forget the unexpected monkey wrench when older parents lose jobs, houses, or suffer medical setbacks.
Borrowing from the family bank often generates queasy feelings for both borrower and lender, regardless of whether the lender is the parent or the child. As one person put it, “It’s a cliché, but when you lend money to a friend, when you lend money to family, it changes things.”
But it doesn’t have to be this way.
In fact, many borrowers have a fierce sense of pride about repayment. Some family members will even insist on drawing up a repayment schedule.
Formal notes are one of the more equitable ways to approach this emotionally fraught situation. For the borrower, a private loan can set a manageable interest rate, create flexible repayment options, and possibly allow future tax deductions. For the lender, there is future interest and principal income, plus an assurance that the loan might actually be repaid.
However, while formal notes can reduce the stress of Family Bank borrowing, Smart Money Magazine adds a final caution. The IRS is particularly vigilant about “interest-free” loans that exceed the $10,000 annual, tax-free gift limit. If you don’t establish an interest rate, they’ll gladly set one for you.
Bottom line: formal notes can make a difference so just make sure your tax accountant ties off any loose ends.
Note: BudgetTrackers currently have two Lender/Borrower options available. They can either create a loan entry in the “My Bills” section or an “I Owe You” memo that connects both the lender and borrower (as long as both are BudgetTrackers) until the debt is satisfied.
Other resources to check out:
Borrowing from friends and family to buy a house. While this article refers specifically to documenting private mortgages, it has pointers that can help with other family-type loans.
Keep in mind that not everyone is a reliable debtor. If you have one of these in your family, check out this useful article (plus, interesting reader comments) from Money Magazine.