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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in general
Do you have an existing student loan that you want to pay-off? There is one strategy that you might want to use to pull this off.
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
Due to the lower interest rate, consolidating your student loan debt by using a mortgage refinance is one of your best options. However, before pursuing this option, here are the pros and cons that you need to consider:
Pros
- Take advantage of lower interest rate – if your student loan interest rate is higher than your mortgage rate, then you can save money.
- Lower monthly payments – by consolidating and having a lower interest rate and longer term, your monthly payment will be lower.
- Tax deductibility of the mortgage payment if structured as home equity loan. Equity loan up to $100K is tax deductible no matter how you used the proceeds for.
Cons
- You are converting an unsecured debt (student loan) into a secured debt (mortgage) once you consolidate it via mortgage refinance. If you cannot pay for your home, you are putting your home at risk of foreclosure.
- Pay more interest if you consolidate. If your student loan has 10 or 15 years, you will be extending your payment period to another 15 or 20 years. That means you will be paying more interest over time.
- Incur refinance closing costs. Need to account for additional closing costs when analyzing the benefit of consolidation.
So if you decide to do this, please carefully consider the pros and cons before consolidating your student loans with your mortgage refinance.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.
Last Updated by Admin on 2017-09-14 09:17:43 PM