How to lend money to a family member

A lot of times someone in your family might run into financial trouble, or need a loan for something big. Loaning money to your family is something many people look at as taboo, and the reason is that many times family members will take what was intended to be a loan and turn it into a gift. This simply does not have to be the case. Loaning money to family can be safe, but here's how to ensure that your loan stays a loan -- not a gift:

 Start by being very upfront with the person. If they ask for money, your first response needs to be "I will only give it to you if you pay me back!" This way they know that is a condition. Clearly indicating that you expect to be paid back is the first thing you have to do, but not the only.



 Along with making the expectation of repayment clean, you need to set the expectation of when you expect repayment to begin. You should take time to sit down with the person and specify when you expect them to start paying you back, how often you expect payments, and in what amount. This puts a clear picture in the borrowers head of what you expect from them, and what they need to live up to if they are going to borrow from you.
 Next, take the time to discuss how you would like to handle late or missed payments. You are family, so you will understand when they get sick and miss work, and so money is tight. But, you need to have clear guidelines for these circumstances before they occur. So decide what happens, and stick to it. Also, discuss if your borrower has anything to put up as collateral in case they do not pay you back.
 Seek tax advice. Unless you legally gift the money to them, and work out some sort of payback agreement that is under the table, you are going to get in trouble with the IRS. Obviously gifts are gifts, and you can't ask for repayment. However, if you lend the money and do not collect interest, you can get in trouble with the IRS. Get the advice of a tax professional regarding how much interest you should charge to avoid a sticky wicket called "imputed interest." Basically, the IRS defines a loan as a transaction that involves interest -- so even if you don't collect it, the IRS will assume a "reasonable rate" and then hold you accountable for paying taxes on it. This means that loaning someone money without interest can cost you money.
 Get it in writing. While no one wants to take family to court, the last thing you want is to be stuck down the line in the midst of a "he said, she said" argument. A contract signed by both parties (and preferably witnessed) is a great way to ensure that the lending terms are clear, and give you a legal foot to stand on if you aren't getting repaid. So, spell it all out, and get it notarized if need be.
 If you are worried about a personal loan, make it less personal by adding a third party to make it more formal. You can hire a third-party service such as Virgin Money to add the proper degree of formality to a personal loan. This protects your money, and it can even help the borrowers credit because some of these companies will report their payments to the credit reporting agencies.
 Know when to say no. It can be awkward to say no, but lending isn't a responsibility you have just because you are family. If you simply don't have the means to offer assistance, or can't afford not to get the money back, or even if it is simply that lending will cause you undue anxiety, then say, "I can't."