Topic: Mortgage Finance

Tips When Borrowing From Friends or Family

There's no doubt that borrowing money from friends, relatives or associates could be stressful and risky. According to the Federal Reserve Board, the rate of default on these person-to-person loans is fourteen times higher than that of bank loans.

So what's the solution? Professional advisors, from accountants and financial planners to attorneys, unanimously agree that if you are borrowing from or lending money to friends and relatives, the keys are to keep your eyes wide open and play it straight. That is, don't assume anything - approach this important financial transaction professionally and put it in writing.

If you are getting ready to borrow from or lend money to friends, relatives or colleagues, or even just thinking about it, these tips from CircleLending will get you on the right track:

Treat the loan seriously
Handshakes are never enough. If you don't write down the terms in a promissory note, the deal will not stand up in court, and the borrower may not claim interest payments on their taxes. Formalizing the agreement protects both parties by spelling out the rights and responsibilities of each and giving the deal the best chance of success.

Use a fair interest rate
Lenders (even family members!) will be much more attracted to the loan if they feel the rate you're offering is fair, or even competitive with what they might earn in similar financial investments (such as CDs or money market accounts). However, especially if the lender is a relative, you must pay the minimum interest rate set by the IRS (called the Applicable Federal Rate) or the loan may be treated as a gift.

Avoid balloon payments
Balloon payments, or lump-sum payments at the end of the loan term, are very risky for both borrower and lender. Borrowers inevitably can't save enough to make the balloon payment and lenders inevitably can't tolerate renegotiating the loan at the end of the term. The stress can be especially difficult when the pair are related. Look to set up a monthly or quarterly payment plan which gives the borrower the best chance of keeping up with repayment.

Enjoy the flexibility
In a private mortgage you can pick your own loan terms when you set up the loan, and can make adjustments as you go.

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Source: CircleLending, Inc is a financial services company serving the needs of the private loan market in the United States, facilitating transactions between relatives, friends and private parties by providing full-service solutions for reducing financial and emotional risk. Click here to speak with a Private Loan Specialist or get a copy of CircleLending's FREE Private Mortgage Guide.