Although it may be more convenient to ask for a loan from a family member than to pay a visit to the bank, be aware that mixing money and relationships can sometimes have dire consequences.
“My advice would be to avoid this altogether,” said Joe Allaria, CFP, partner at CarsonAllaria Wealth Management. “There is virtually no way that taking a loan from a family member will not carry the potential of drastically changing or harming the relationship in some form.”
Even if you are confident that you can be a responsible borrower and keep your relationship intact, it’s important to not ask for too much. Here’s what experts say the limits should be for a loan from a family member.
How Much Money Can You Borrow From a Family Member?
According to experts, the answer to the question of how much you can borrow isn’t a hard number figure, but rather, it depends on your individual circumstances.
“Never borrow more than you are completely confident you can pay back,” said Brian Walsh, CFP, senior manager of financial planning at SoFi. “You should also never ask to borrow more money than your family member will be comfortable lending. It is an absolute shame to let money ruin relationships, and this can be avoided through clear communication.”
On a technical note, be aware that there may be tax implications for a larger loan.
“A family loan over $10,000 requires a written agreement by the IRS and is subject to tax rules,” said Scott Lieberman, founder of TouchdownMoney.com. “Although the amount requested from a family member is a personal choice, these tax implications may sway your decision on the amount.”
How To Take a Loan Out From a Family Member Without Ruining the Relationship
In addition to being mindful of how much you ask to borrow, there are other steps you should take to ensure the process of getting and paying back the loan go as seamlessly as possible.
Communicate Openly About Expectations
“Proactive communication is the key to avoiding arguments and jeopardizing relationships,” Walsh said. “If you are borrowing money from a family member, discuss terms and expectations. This should include when the money will be paid back, what — if any — payments will be made along the way, what — if any — interest will be charged and contingencies if things do not go as planned.”
Walsh has learned firsthand the importance of setting clear expectations when taking out a loan from a family member.
“Without clear terms, there is ambiguity for everyone involved,” he said. “I made that mistake when I borrowed money from a family member more than a decade ago. I was paying them back a certain amount every month but still owed them money. Because we never discussed either of our expectations, I felt extremely self-conscious talking about fun things I did because, despite making payments, I still owed them money. It really hurt our relationship because they were offended that I basically stopped talking to them about what was going on in my life.
“Finally, we addressed the elephant in the room and it turns out my payments were acceptable. It wasn’t until we openly discussed things that we could remove the awkwardness created by the unknown.”
Put It in Writing
Once expectations are ironed out on both sides, put the loan agreement in writing.
“We absolutely recommend the minimum of a basic promissory note and amortization schedule,” said Doug “Buddy” Amis, CFP, president at Cardinal Retirement Planning. “These are necessary to document the loan in writing, and have all the material information recorded — principal, interest rate, payment schedule and amount.”
Additional Actions You Can Take
To make the family member feel more comfortable during the loan term, Stephen Dunbar, a financial advisor with Equitable, also recommends doing the following:
- “Offer to work for or work off the loan by using a skill you have to benefit the family member you are trying to borrow from.
- Offer to pay interest on the loan so the family member does not suffer lost opportunity costs when they pull money out of cash or investments to make the loan to you.”
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