Lenders may charge a relatively low interest rate. However, if you do not calculate interest or commissions below the market rate, the IRS may consider your loan as a “gift” and you, as a lender, could be on the hook of tax on the gifted. In order for your family credit not to be considered below market, you generally have to charge the applicable federal rate (AFR). Talk to your tax advisor before you agree on an interest rate. Setting an interest rate on money lent to a parent could conflict with the values and relationships of the family, as the transaction resembles a business conclusion, just as in the case of a parent-child loan contract. But sometimes there is no choice but to borrow from a family member. In many cases, family credit is a success – but success requires a lot of conversation and open planning. You have to deal with administrative issues and the emotional (perhaps more complicated) side of things. You also need to navigate through potential financial and legal pitfalls. Think carefully about the consequences for your personal relationship with the borrower. Of course, it also has an impact on the loan refusal, but at the end of the day, it`s your money and your decision.
If you have any real concerns about the possible consequences of the loan, they will outweigh the bad (usually temporary) feelings of refusing to lend. 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. A simple loan contract describes the amount borrowed, whether interest is due and what should happen if the money is not repaid. ☐ If one of the contracting parties sues to assert its rights under this agreement, the dominant party is entitled to recover from the other party its immigration (including reasonable legal fees and fees) caused by the appeal and complaint. ☐ mandatory conciliation. Mandatory arbitration is conducted in accordance with the rules of the American Arbitration Association. ☐ mediation. ☐ mediation, then mediation. If the dispute cannot be resolved through mediation, then the dispute will be resolved through binding arbitration, in accordance with the rules of the American Arbitration Association.
If you still want to make credit after processing the above issues, you will probably have thought about a number of conditions in the process. So it is clear why a written agreement is a good idea.