Loan agreements with friends and family are a common occurrence. The Federal Reserve Survey of Consumer Finances, states that family and friend loans total $89 billion annually. A company called Finder calculated the figure after a 2018 study and came up with more like $184 billion. So precisely there are lots of transactions happening between families and friends.
Making family or friends loan agreements can also be tricky. While you may be comfortable lending money to your loved ones, ensuring both parties understand the loan terms is essential. It specifies the interest rate, when the money is due, and what will happen if it’s not paid on time. By taking the time to create a formal agreement, you can avoid any misunderstandings down the road.
Procedure on Borrowing from Family or Friends
It’s advantageous to borrow from a family or friend because the lender is more likely to charge a lower interest rate and allow you more time for repayment without filing a court petition. Therefore, it’s essential to know how to borrow from such an individual:
- Discuss what is involved in lending you money and what happens if you default on the loan.
- Agree on a repayment schedule and how much interest will be charged. The Interest Act allows family members to charge each other non-commercial rates, which are fair.
It is usually good to have a lawyer preparing such documents, so there is no doubt about their enforceability or other provisions.
What If You Default The Loan?
Many people who take out a loan with friends or family will not default. If you don’t pay, the lender can sue you because of the contract as proof in small claims court. However, some states have an “Oral Contract Action Statute” law that says if there is no written contract, you cannot be sued for a loan even if you default on it.
A borrower needs to negotiate before judgment to avoid the lender’s pursuing their assets.
How Do You Preserve Personal relationship?
Every person faces financial constraints, but there are ways to tackle them. One way is to get loans from friends and family members for personal, educational, or business needs. Loans can save you in many different situations, but there is a fine line between the loan and the help offered by family and friends.
It is best to have a written agreement to clear both parties on all the terms. Loans with friends and family can be tricky, notably without a written agreement. The borrower should give updates to the lender on using the funds, make repayments, and ensure no late or missed payments.
When you have a family member or friend that needs help with cash to get them over the hump, it can be challenging to say no. But if you are not careful about how much money they borrow and what your expectations of repayment are, this situation could become an even bigger problem down the road. Loan agreements between friends and family members should always specify who is responsible for paying back the loan (and when) as well as any collateral involved in case of default. So if you need a loan agreement for any family or friends transaction, you can download such loan forms for free on this website without spending on hiring a lawyer for this cause.