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Debt Collection in Florida Advice for Loans

Sunday, September 30th, 2018 | Florida Debt Collection | No Comments

Should You Lend Money Friends or Family?

Debt collection is The Cash Flow Group’s specialty and we are here to help!

It is a well-known rule that lending money to family members or friends is a “no”. Shakespeare admonishes us with his immortal words, “Neither a borrower nor a lender be.” It is the words that follow that inform us of the consequences, “For loan oft loses itself and friend.” If you loan money to a friend or family member, you can expect to lose both the money and the relationship. According to a money-etiquette survey, 57% of people had a relationship ruined this way. Still, many people who are in a position to help, feel compelled to. Especially when close friends or family is in need. This does not have to be a bad thing as long as you go about it with your eyes open.

Here are some things to consider when your friends asking for money:

What’s More Important – Repayment or the Relationship?

If someone approaches you for a loan, chances are they aren’t creditworthy to qualify for a loan from a lender. So, you know going into it you are taking on the risk of not seeing all or some of the money again. The question is whether repayment of the loan or the relationship is more important to you. What happens when the borrower gets behind on payments or no longer returns your calls. Know in advance how you would handle this situation. You can expect things to get very awkward, especially if the person is at family events or around town. So, if you value the relationship, you can treat the loan like a gift.  The person will likely try to repay you as if it was a loan, but the pressure is off the relationship.

Are You Helping or Enabling?

While you may have the right intent, you may be hurting the very person you are trying help. This person may need money to cover basic living needs or to pay off credit card debt. In some cases, loaning them money may only exacerbate their financial problems. What they might need is financial counseling. They may also need help with finding alternative sources of income. If you do loan them money, do so under the condition they seek the help they need to turn things around.

Don’t Make it Open-Ended.

The problem with loaning money to a friend is they are often open-ended based on a handshake. A handshake has no specific terms for repayment. That leaves both parties in a state of limbo with no expectations to when the loan is to be repaid. It also creates a false notion in the mind of the borrower that there is no sense of urgency to repay the loan. You need to have clear expectations or specific loan terms. Approaching the borrower about payments becomes difficult without terms. If you are going to loan money, put it in writing with specific terms.

Is the Loan IRS Compliant?

Lending money to family or friends is often interest free, which is not a good idea.
 
First, it diminishes the value you place on the money you loan someone; second, it could put you at odds with the IRS. Charging interest is not unreasonable, especially when it at below-market rates. The IRS expects you to charge interest on a family loan if you don’t want it to be a gift for tax purposes. The IRS doesn’t care about small loans made to children. Loans of $10,000 or less are not subject to gift tax rules if they are not used for investments. Larger loans could show up on the IRS radar if appropriate interest is not charged. You need to avoid treatment as a taxable gift. To do this, the loan needs to be in writing with the amoung terms, and rate of interest. Define all these things. The IRS requires a charged interest rate which is now reported as income by the lender. If the loan is being made for a down payment on a house, the borrower may deduct interest charges. Secure this loan by a lien on the home.

What are the Alternatives?

One alternative is to say “no.” That may be hard to do, but, in some cases, it could be the right thing to do. Or, you can say “yes,” but with conditions. First, is that they at least try to have a personal loan on their own. We know you don’t want them to get stuck with a “payday” type loan. There are alternative lending sources. These sources can offer a priced personal loans for people with less than good credit.

The Cash Flow Group is here to answer any questions or concerns you might have about loaning money.  Contact us today!

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