How to Do a Loan Agreement with Family

Money can occasionally be tight, and sometimes you may need a little helping hand to get by. For a lot of us, that may mean heading to a bank for a loan or credit card. For others, it may be heading to mom and dad, or maybe brother or sister, for a bit of extra cash to tide us over. Sometimes the amount we need is more than a little, and in these cases, it is incredibly important to do the right thing and ensure the money is loaned the right way with the right agreement.

It may be that you want to start a business, buy a car, or even purchase a new home. If your family is wealthy enough to provide a personal loan in these cases, then you are in luck. It is crucial, however, to remember that a loan of this type still comes with issues that need to be ironed out before borrowing. In most cases, it may be necessary to draw up legal paperwork to ensure that all parties are covered.

The Benefits of Receiving a Loan from a Family Member

One of the main advantages of getting a loan from a family member is that they are likely to be more flexible about payments and much more likely to lend you all of the money you require, not just a percentage. They might also charge no interest on the money, and if they do, the interest is often much less than a bank.

Potential Pitfalls of Lending Money from a Family Member and How to Avoid Them

The biggest pitfall you may come across when lending money from a member of your family is that if anything goes wrong, your relationship with them could be irreparably damaged. The easiest way to avoid this is to make sure you make payments on time. If this can’t be done, for any reason, then explain this in good time and offer a date when you can make good on the payment.

Remember, because you know the person well does not mean that your responsibilities in respect of the loan are any less.

How to Create a Loan Agreement Between Family Members the Right Way

If the amount of money being lent is more than the cost of a night out or a good meal, then it is a wise move for all parties to create and sign a loan agreement, regardless of how you know the lender.

The agreement should include things like the amount of money being borrowed, any interest rate that will be charged, cost and frequency of monthly installments, any lump sums that are required to complete the loan, and the rights of the lending party in case of non-payment from the lender.

The last detail is incredibly important to avoid any unfortunate “disagreements” caused by uncertainty or misconceptions as to what would happen if things don’t run smoothly. The loan agreement should detail any additional costs that will be added to the loan in the event of a failure to pay, any collateral that will change ownership if payments are not made, any legal action that may ensue from failure to pay, and any changes that will be made to the loan terms if you do default.

Some websites will help you create a loan agreement between family members the right way. Some will offer free draft or template loan agreements that can be amended to match your needs.

Needless to say, before entering any loan agreement, you should seek legal advice. Speak to a lawyer or other legal service and follow the information they give you.

What Could Happen If a Loan Agreement Between Family Members Is Not Paid

This may come as a shock to many, but lending money from a family member does not negate any legal obligations for that debt. The fact that the lender is related to you does not get you off the hook if you cannot pay it back.

Like any other type of loan contract, if you fail to follow the terms of the agreement you can face legal action and other sanctions that allow the lender, in this case your family member, to recoup their money. If you have signed a loan agreement, then this contract will be used as proof against you if the case goes as far as the courts. Not only will the lender be able to claim the value of the entire loan back but also any other costs they may incur in relation to their attempts to reclaim the money.

If you do fall behind in paying back a loan to a loved one, then it is important to keep communication with them open. Talking to them about what is going on and why you cannot make a payment is the best way to avoid a break-down of the relationship.

The Final Word

Lending money from members of your own family can be a fantastic blessing for when you are short of cash or looking to finance new business ventures or purchases. But it is so easy to fall out if things don’t run smoothly.

That’s why it’s important to ensure every factor of the loan is written down on paper so that all parties know exactly what their rights and responsibilities are.

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