What is a family loan?

A family loan is a financial debt that a person owes a relative. In most cases, the agreement is extremely informal without a contract or interest that can cause repayment problems. The boundary between lending and donation sometimes becomes blurred, while some experts even recommend that the creditor simply do not expect his money back. From the tax point of view, the debt is not usually complicated, but the strain of the relationship that can cause is the reason for this method to approach some caution.

How does it work

According to this type of lending agreement, a person goes to a relative for money instead of a bank or a similar company. The degree of blood relationship is not particularly important, but the relationship is usually so close that both people feel comfortable to work together on financial questions. In most cases, the agreement is very informal and is not registered, while the debtor repays without interest.

reasons for use

people often borrow from family members because they require less work than to go to the bank. The standard procedures used by financial companies, such as a person's loan control, are almost always omitted from the equation. Moreover, sometimes people want money for something that the bank could consider unnecessary, stupid or too risky. Most relatives do not charge interest, so raising money is often the cheapest option. Individuals also often look at family members when their credit is bad enough to remove more formal options.

repayment

The main problem with this type of debt is that people involved often cannot explain the conditions for repayment in a specific way. The creditor assumes that because the debtor is relative, and because "life becomes" that he plans plans, it is not nice or necessary to strictly define how and when to repay. In fact, the general motto is usually: "He" will pay it when it can. "Similarly, one who receives money usually believes that he is inorder to make payments that are late or lower than they are planned because a relative providing a loan will "understand" trouble or simply do not care about how and when it gets the funds back.

Accepting this kind of access to repayment can cause further financial and planning problems. The person who receives money usually does not include the loan installments in his monthly budget, making it difficult to be consistent. An individual providing cash cannot commit it to anything in the future because it cannot count on obtaining payments as expected.

repayment is usually better when the debtor looks around his relationship with the creditor and perceives him in the same light as the bank, credit union or similar business. It should be reasonably sure that it can stick to the payment plan and agreed to the amount of payment. If one thinks he will not be able to fulfill his duties, maybe want to ask for a gift or ask for money completely.

Using Agreement

vzLooking for problems that sometimes creates a lack of clearly defined repayment plan, experts recommend that people commit serious rotations of family loans by creating a formal contract. This document may not be particularly complex; They only have to outline the basic conditions and explain what the consequences, if any, will be enforced if the money remains unpaid. The names of all involved and their contact information should be in the agreement, as well as their signatures and the date of signature. Many websites have a download template if a person does not want to create one from zero.

The main advantage of using the contract with a family loan is that if the creditor must sue to get his money back, there is a record of the obligation to pay. The judges use the document together with any records of payments that could exist to come up with the judgment. Verbal agreements make have legal status, but without hard evidence the judge must rely more on their intestines or instincts and probability,That the creditor gets a favorable result will drop.

Assigning a gift label

For some people, it is easier to consider money as a gift than to worry about determining the strict conditions of repayment or processing of the contract. With this method, the creditor assumes that the debtor will not pay as plan, pay in different amounts or will not return any cash at all. This makes sense with regard to the fact that, unlike when a person passes through the bank, there is no loan insurance in these agreements. This also means that the creditor only gives money if he can afford to lose.

tax reflections

In the US, the loan does not have less than $ 10,000 (USD) no tax obligations. A person may consider this amount for a year "gift" without paying taxes from gifts. The internal income service only calculates as interest as a taxable income. Most people do not have to worry about it, because unlike banks, relatives usually do not bother to charge anything for the privilege to get cash.

when a family loanAnd exceeds $ 10,000, the situation may become less clear. In order to avoid paying tax taxes, people must demand the money provided, but the IRS can assign an interest rate to the person that he expects to collect as "income". To prevent this, the creditor may want to consult a good tax lawyer or accountant to make sure that the debt conditions are clear, especially if no interest is charged.

The creditor can also claim unpaid amounts that will never be paid as a tax loss. Sometimes, however, the IRS will try to collect taxes from the debtor if money technically becomes a donation due to failure. It can be a more reasonable step than to sue, but it is still a bit complicated and can be best managed by a tax expert.

relational strain

Failure to repay the debt of this kind can bother family relationships, although these connections have been excellent in the past. The creditor could feel offended and cheated if he did not get his money so farThe debtor usually doesn't like financial watches. The conflict can easily spread to relatives who have not participated in the agreement because they often feel obliged to defend one or the other when problems appear.