One of the most neglected areas of family credit contracts is tax implementation. This is because most people neglect the fact or do not know that family credits are also taxed on the basis of interest. It is therefore of absolute importance for individuals to lend amounts that do not exceed the IRS tax threshold. But if you agree to a loan and set an interest rate higher than the « applicable federal rate » set by the IRS, you can avoid it. Some states also set legal limits on the interest you can calculate on credits, although these anti-wear limits are not relevant in most family loan situations. The IRS takes care of everything — even the loans you lend to family members. Check with a local tax advisor before signing contracts or borrowing. A lender could go ahead with a family loan, but lenders should take certain precautions to minimize the considerable risks they take when extending a loan to a relative. Interest is a way for the lender to calculate money on the loan and offset the risk associated with the transaction. Relying only on a verbal promise is often a recipe for a person who gets the short end of the stick. If the repayment terms are complicated, a written agreement allows both parties to clearly define all the terms of payment and the exact amount of interest due.
If a party does not respect its side of the agreement, the written agreement has the added benefit that both parties understand the consequences. Loans are often made informally, orally, to save a friend or relative who is experiencing temporary financial difficulties as quickly as possible. However, money and friendships do not usually mix. If a borrower breaks the verbal agreement, or even denies ever obtaining a loan, it will make the situation extremely unpleasant for the lender. For it is the lender who bears the burden of proof if the case is tried. But if you pass on money to a family member, you are already giving up the potential interest income. These are the opportunity costs of a loan. If you calculate interest, you make up for that loss.
Even if you lend to a family member, you can of course charge interest.