We have all had that experience with the ups and downs that comes with borrowing money to family members, especially when it’s time to pay it back. Certainly, mixing money and family is quite tricky and can put your relationship as a borrower at risk with the lender. Therefore, it is necessary that there is clear communication and even a written agreement to detail the loan terms. Family loans should be treaded on carefully because more often than not, they cannot be avoided.
What are the pros of family loans?
Some of the advantages of family loans include:
- Easier approval due to lack of formal processes
- Cheaper loan rates, if any at all
- Flexible repayment, especially in times of hardship
- It helps you avoid risky loan options
What are the cons of family loans?
Some of the disadvantages of family loans include:
- There is a high potential for conflict
- Possible tax implications depending on the local laws in your geographic location
- Absence of credit building
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How do I apply for a personal loan for a family member?
Put the family loan application in writing. Putting family loan applications and agreements in writing is one of the best ways to avoid issues when it’s repayment time. Basically, you can draw up a contract that spells out the terms and conditions of the loan which both parties are to sign. This way, there is always a reference in case of misunderstandings and arguments.
Some of the basic family loan terms to include in the agreement are:
- The total amount borrowed and what it would be used for
- Loan’s interest rate
- Repayment terms of the loan including payment amount, frequency, and tenor of completion
- What happens if the borrower defaults or completely stops paying temporarily or permanently due to an emergency
- Whether the loan can be repaid early without any penalties and the amount of interest that would be saved on early payment.
What are the alternatives to family loans?
In a situation where you cannot obtain family loans, here are some alternatives:
1. Personal loans
You can always borrow a personal loan from credit unions, or online lenders. The beneficial aspect is the fact that personal loans have no restrictions on what you can use them for. Also, they can be repaid in monthly installments for years.
2. Co-sign loans
This is a type of loan in which the lender allows you to add a family member as a co-signer of the loan during the application. This way, it increases your chances of the loan being accepted and puts less pressure on your family member since they are not providing the cash. However, tread carefully because it could affect both your credit score and damage your relationship. As a cosigner, you have to repay the loan if the borrower can’t.
3. Small business loans
This is most suitable for those looking for family loans to start or grow a business. Basically, small business loans provide higher loan amounts, and repaying on time would help you build credit. Most times, they offer amounts that you cannot get from a family member.
Bottom line
Family loans are like walking on eggshells and could cause a lot of problems, especially when the borrower cannot repay. Therefore, it is important to have a written agreement as a guide or refer to alternative loans.
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