Lending money to family and friends – when it comes to loans, most refer to loans to banks, credit unions, mortgages and financial aid, but hardly do people consider getting a credit agreement for their friends and family, because that`s exactly what they are – friends and family. Why do I need a credit agreement for the people I trust the most? A credit agreement isn`t a sign that you`re not trusting someone, it`s just a document you should always have in writing when lending money, just like having your driver`s license with you when you`re driving a car. The people who make it difficult for you to want to write a loan are the same people you should worry about the most – you always have a credit agreement when you lend money. Investing an interest rate for money lent to a parent can conflict with family values and relationships, as the transaction resembles a transaction, just like in the case of a parent-child loan agreement. But sometimes there is no other way than to borrow from a family member. However, if you agree on a loan and set an interest rate higher than the applicable federal rate set by the IRS, you can avoid this. Some states also set legal caps for the interest rates you can calculate on loans, although these anti-usury limits are not relevant in most situations where there are family loans. In order to avoid such adverse effects (on relationships or finances), it is good to first think carefully about the granting of the loan, and then formalize the terms of the loan and repayment agreements in a written agreement. A loan is not legally binding without signatures from both the borrower and the lender. For additional protection for both parties, it is strongly recommended to have two witnesses signed and to be present at the time of signing. Most people who lend to family or friends don`t charge interest.
You should, however, ask yourself if you will lose significant income from the money during the period. It might be a good idea to calculate at least the same interest you would earn on the money if it remained in your possession. Calculating interest will also deter the borrower from viewing the loan as a gift. On the other hand, they can perfectly turn to a financial institution for credit, but are looking for a more advantageous alternative – it is up to you to decide if you want to commit. If you want to credit after answering the above questions, you`ve probably thought of a number of conditions in the process. So it`s clear why a written agreement is a good idea. By presenting your conditions in writing, you and the borrower can give your agreement in full knowledge of these conditions and repayment. Many consider a handshake between family members to be an enforceable contract.
But for the IRS, they consider money transfers between family members to be gifts, unless there is evidence available in the form of a family credit agreement. To ensure the legality of your loan, you need to consider the following steps: The most important feature of any loan is the amount borrowed, so the first thing you want to write on your document is the amount that can be found in the first line. Follow by typing the name and address of the borrower and then the lender. In this example, the borrower is in New York State and asks to borrow $10,000 from the lender. The first paragraph should clearly indicate the name of the lender and the borrower, as well as the amount borrowed and the date on which the loan was initially granted. . . .