How to Reduce the Relationship Risks When Lending to Family & Friends

Simon Zhen

By , Staff Writer
Posted on Fri Aug 16, 2013, Last Updated on Thu Jun 19, 2014

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Lending to family and friends has always been a sticky situation for those who are not comfortable with simply giving the money and dropping expectations of repayment. Far too often do interpersonal loans result in tarnished relationships when borrowers fail to hold up their end of the deal. Family members take each other to court and sever relationships.

Luckily, many companies have launched with their own approaches to solve this common financial issue.

Companies such as LoanBack, WikiLoan and LendingKarma offer to help properly document, track and manage personal loans that are made between friends and family. For a one-time fee, usually less than $100, you can draft a legally-binding loan contract, configure a payment schedule, record loan activity and more.

National Family Mortgage is another company that will help legitimize a family loan for a mortgage. The company goes beyond the production of official paperwork for intra-family loans. National Family Mortgage registers the mortgage so that borrowers can deduct mortgage interest payments and prevent IRS scrutiny when dealing with gift taxes.

However, these loans are not recorded by credit bureaus. So good repayment behavior is not going to help borrowers boost their creditworthiness. The tools offered by these companies help dictate the loan terms in a clear-cut fashion to avoid any misunderstandings. Also, they make it easier for lenders to produce documentation in the event that legal action must be taken when borrowers fail to repay.

Other companies step in to act as the middlemen. Through popular peer-to-peer (P2P) lending platforms such as Lending Club and Prosper, prospective borrowers ask for a loan and investors can decide when or not to fund all or a part of the loan. The P2P lending companies will collect payments from borrowers and disburse repayments to lenders.

Friends and family could opt to fund the entire loan through a P2P lending platform. The loans issued through these companies will show up on consumer credit reports — bad credit behavior such late payments and defaults will be noted.

Since the longest loans offered by P2P lending platforms do not exceed 5 years, common purposes for P2P loans include debt consolidation, purchasing a car, home improvement and weddings/engagements.

Whether people turn to these companies to document or issue interpersonal loans, family and friends should be prepared for the possibility that borrowers may not fulfill their repayment obligations. The general rule for personal loans is: lend with the expectation that you won’t get a cent back.

 

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