Family Loans: Loaning or Lending Money to Family Members

Having a fair amount of savings is a blessing people bestow upon themselves through diligent budgeting, hard work, and living below one’s means. One of the great things about keeping the money one makes is that it can be used to help worthy causes and loved ones.

When it comes to helping loved ones through a family loan there are some inherent risks. The challenges that come with loaning money to family members begins with a clear understanding between both parties.

The Lending Terms of a Family Loan

When loaning money to a family member it is imperative that the transaction is treated as though business is being conducted. This is for the good of both parties.

The terms should specify what amount is being lent, how long it will be paid back in, the payments to necessitate this period, the interest rate (if any), and the results of non-payment.

Should you Lend Money to Family?

If this process of creating a contract with an impartial witness, such as a notary public, seems uncomfortable, it will be even more uncomfortable if no contract is made and the family member who received the loan pretends nothing of the sort had ever happened.

Some family members are great candidates for receiving a loan, and others should seek the assistance of a bank, leading the answer to the above question, ‘should you lend money to family?’ to be, it depends on the family.

If the lender is going to feel a right to tell his family member’s personal business now that he or she is his banker, then this is a person who should not loan money to family. If the borrower is going to feel entitled to the money if paying it back is less comfortable than taking a vacation and buying a new car, then this is a person who shouldn’t be lent to.

Pros and Cons of Loaning Money to Family

There are several reasons not to lend money to family, but on the side of where it is good includes:

  • Helping a loved one
  • Keeping money in the family
  • Gaining experience in business

Cons of giving a family loan are often discussed by radio show host Dave Ramsey who says on The Dave Ramsey Show that ‘Thanksgiving dinner tastes different when it’s with your banker.’

In addition to this, the lender must not loan more than he has the capacity to forgive both emotionally and financially. If this amount is $0, then the con here is that the lender realizes he needs to either change his financial habits, or his ranking of importance of money.

When giving a family loan it is important to understand that the loan may end up becoming a gift. If this transition cannot occur, then the relationship can end up in ruin, and that isn’t worth any amount of money.

Reasons Why Instant Payday Loans Should Only Be Used As A Last Resort

If you have found yourself in a tough spot and you need some cash fast, then the only thing that might come to your mind is taking one of the instant payday loans you have so often heard about. Before you take this step and apply for a payday loan, there are several things you should know that might help you consider a better alternative. Learn about the risks and pitfalls of taking this type of loan and a few things you could to in order to go through a financial difficulty.

Payday loans explained

So you probably know that instant payday loans are just that, instant cash. You have an emergency and you need some money fast. Perhaps your car has just broken down and you need it to go to work and earn more money or maybe your child is ill and you need the cash to buy medication. What you do is you go to a pay day loan store and ask for a few hundred bucks. You will have to repay these in two weeks or something like that, and you will also have to pay a fee for the amount borrowed. By hey, the lender asked for a 20 percent fee which doesn’t seem so bad, considering that you need the money now and there is no place else to go to. You will also write a post-dated check to the lender in order to allow him to cash in on the debt if you fail to pay it yourself, and that’s that, things are settled. But are they really? And how much would you end up paying?

So how much could you end up paying?

Here is where most borrowers fail. They need the money, but not because of a once in a lifetime emergency, but because their income just isn’t enough to cover the costs of day to day living. Perhaps that is not your case, but what if the car repair will cost more than you were expecting, or what if your child has a severe illness that will need special treatment? Then you will find yourself unable to pay the instant payday loans to the lender and so you will be forced to roll them over. You will pay the same fee every two week, and before you know it, you will end up having to pay many times the money you borrowed in the first place.

It is not unheard of to have hundreds or even a thousand percent annual percentage fee on instant payday loans. How is that possible? Just consider 20 percent every two weeks. That makes 100 percent in two and a half months and 200 percent in five months. And how much would that amount to in ten months or more?

There are better ways

Especially if you are going through rough times and your income is not enough to cover the monthly expenses such as rent, food, mortgage, etc, then you should avoid instant payday loans at all costs. You could try to find a second part time job and bring in some extra cash, or try to improve your credit score by making payments on time or even try to find a peer to peer lending service that could help you out. And for emergencies such as unexpected car breakdowns or illnesses, it is a better idea to start saving into an emergency cash fund just so that you have money in these kinds of situations. Just remember that you should never try to fix your financial situation by taking instant payday loans, it will only make matters worse and get your debts up even more.