How to Loan to Family

It could be that you are the wealthy relative in your family, or maybe you have access to funding and a family member wants your help. However you got there, you are at a point where you can loan money to family and you are willing to make the loan.

Instructions

Difficulty: Moderate

1. Ask for a financial package. You need to see a breakdown of the loan request. Find out what your family will buy, why they want to buy it, the terms of the loan request and the rate of return.
2. Request a credit report. While credit reports can be misleading, a poor credit score may indicate that your family member does not understand financials. Depending on the information in the credit report, you need to ask for a monthly budget analysis.
3. Meet with your family. You need to set a specific time and place to meet with the family member requesting the loan. At the meeting, discuss the financial package. If you need more information before you feel comfortable proceeding, ask for it.
4. Set up a payment system before you turn the funds over to your family. Determine if the payment is to arrive on the same day every month for the same amount of money, or if you will send a monthly invoice to the borrower. It is possible to establish an automatic fund transfer from the borrower's account into your account.
5. Know the worst case scenario. You need to know what you will do if your family fails to deliver payment. Establish a late fee to be charged if a payment is late or missed. Also discuss with your family the possibility of turning them over to collections in the event they fail to fulfill the contract.
6. Draft a contract that clearly states how you will fund the loan, the payment terms and the specific details of the loan transaction. This should be a legally binding agreement between you and the borrower.
7. Fund the loan. There are several options available on how you can fund the loan. You may get a cashier's check from your bank, you may transfer funds into the borrower's bank account or you may just hand over the cash.

Tips & Warnings

• Some websites will broker a contract between family members.
• You should check with a CPA to determine tax liabilities prior to lending money.