Personal loans
Personal loans from family members are like land mines. Take a few simple steps to minimize risks.
The bank is usually the first place people think of when they need personal loan. However, if the bank is not an option, many would-be borrowers need personal loans from their families—a situation rife with opportunities for resentments, hurt feelings, jealousy and financial ruin.
No matter how badly needed, think twice—or thrice—before approaching family members for personal loans. Borrowers must anticipate potential problems and take all precautions to avoid them.
The first and most important consideration should be determining the most appropriate family member to approach. No matter which family members are approached, extending and accepting personal loans will probably have some uncomfortable consequences. When parents make loans to their adult children they feel entitled to know the details of borrowers’ finances, and to comment on them. Personal loans from siblings may also affect relationships with their spouses.
Before asking for personal loans, borrowers should consider the following:
- Can this candidate afford to make personal loans?
- Is this candidate likely to agree to make the loan?
- Can they afford the financial hit if the loans cannot be paid back?
- What effect will the debt have on the relationship?
- What will the effect on the relationship be if the loan cannot be paid back?
Borrowers might make suggestions that will increase the likelihood of a positive response and decrease the discomfort and risks inherent in personal loans from family members.
- Offer collateral. Doing so means lenders can place liens against the property if the borrower in case the borrower ever files bankruptcy. Lenders can then place liens against the assets and receive repayment along with other debtors.
- Give potential lenders the option of co-signing on personal loans from the bank. Doing so makes everything more official and involves a third party to neutralize the emotional aspects of the transaction.
- Whether it is done at the bank or over the kitchen table, insist that personal loans carry interest charges and very specific terms and put it all in writing. Have the agreement notarized. Ask for receipts on all payments. Following these steps increases the likelihood of repayment and avoids the potential of later confusion.
Finally, do not trust that personal loans from parents to their children will never be divulged to other family members. When other siblings later learn of the “secret” advance, they are likely to become suspicious, jealous and concerned about their stake in any future inheritance.
Do not put family members in a position that is uncomfortable at best and incendiary at worse. Instead, make any personal loans public knowledge and keep family members apprised of repayment progress. Ask that parents revise their wills or trusts to state that any remaining debt be deducted from the borrower’s inheritance and make sure other effected family members are aware of the new conditions.
American Unsecured
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