Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Dec 14, 2011

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When big banks and traditional means of lending fail borrowers, or when one desires to avoid the paper work and strict lending practices of institutions, there is often another route to obtain money: loved ones. But the decision to borrow money from a family member (or loan money out to a family member) is not a decision to take lightly. In fact, this form of lending may come with even more strings attached than traditional personal loans—and the repercussions can be far more irreparable than credit scores.


Take a Look at the Current Market


Whether borrowing or lending, the current market rates can be a significant tool for family members to make sure they are not getting ripped off.


Interest rate reports, current tax conditions, and a study of what the borrowed money is needed for can help any family member determine how much to lend and at what rate. More often than not, family will try to provide a deal for their loved ones, so charging lower interest rates than traditional lenders could prove to be very helpful.


That being said, family members who are issuing a personal loan need to make sure they are protected: charge an interest rate that is realistic for the borrower’s financial circumstances. Also, only issue an amount that the borrower can feasibly pay back. There is nothing worse than a family feud over monetary matters.


For the borrower, market research is crucial so they know whether or not they are being ripped off. It may not even be a deliberate move, as not everybody is financially up-to-date, and family may offer rates to borrowers that they believe are correct, or simply “remember” were correct. Borrowers are responsible for protecting themselves by becoming educated.


The use of an online personal loan calculator can be invaluable when determining affordability at various rates.


Think of an Appropriate Term


The next step is determining how long the money will be borrowed for. A family borrower may try to stretch themselves in an attempt to repay debt quickly since they’re dealing with a family lender, but this may not be a wise move. Borrowers must propose a realistic term with a well-planned payment schedule—one that they know they can afford and pay off.


For the family lender, it’s their responsibility to keep their borrower down-to-earth when it comes to a payment plan proposal. Don’t allow a borrower to take a loan out longer than they would be allowed to at a bank. On the same token, don’t allow a borrower to stretch themselves thin.


Work together and come up with a healthy, realistic loan term.


Put it in Writing!


After agreeing upon a personal loan amount, interest rate, and term, then it’s time to draw up a contract.


This is not a step to miss, so it needs to be said again: make a contract.


Just turn on a mid-day television show featuring judges solving disputes between friends and family members. They all echo the same sentiment: “Don’t lend money without putting it in writing.” God forbid an argument arises between family members over lent money, but if it does happen, having a signed contract will be helpful in not only solving the dispute, but also in saving the relationship. Families are there to help, love, and provide support. They’re a strong bridge, and one that shouldn’t be burned over trivial monetary matters.


Consider an Alternative


Maybe a family member doesn’t have the credibility to risk lending money to, or maybe a borrower doesn’t have financially able family members to borrow from. If this is the case, fortunately there are alternatives. Banks and credit unions offer personal loans and installment loans. If neither of those are viable options, then payday lenders are usually willing to lend to those with even the worst of credit.


Just remember, family tends to be more forgiving than banks when it comes to delinquencies. However, the ultimate repercussion from defaulting entirely on a loan may result in something much more severe when dealing with family.