When you borrow from a family member, there’s more than money at stake. If you can’t honor your end of an agreement, it can hurt feelings and breed resentment between you and the people you care about. Consider that risk carefully, and take your time working with your family member to structure realistic terms that work for both of you.
Whether you need money to go back to school, start your small business or cover an emergency expense, be honest. Whether or not your family members ask you to provide collateral to back the loan, they put faith in your word that you’ll pay them back. Because of the trust in that relationship, it’s important to be clear about your intentions from the very start.
A loan is a business transaction, and it helps both parties to keep it professional in case of any disagreements. If you’re not sure if your agreement is legally sound, or if you want some assistance, a legal advisor can help you draft an agreement that covers the key elements.
Your formal agreement should include the type and frequency of payments you plan to make. You can work together on a schedule that reflects your needs and the lender’s: For example, if it’s a large loan and you have a steady income, it might make sense for you to make fixed monthly payments. For small or short-term loans, you might decide to repay the full amount on a certain date.
Think the interest rate is too high? Worried you won’t be able to make your monthly payment? Talk to your family member immediately and let him or her know that you’re having an issue. Do not wait for problems to boil over and get worse—be forthright in your approach, and ask the lender to work with you to figure out solutions together.
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