Family Financing Basics

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The thought of family financing is common when you or one of your relatives needs money. The idea is generally to help somebody close to you, and to "keep it in the family" instead of having a borrower pay interest to a bank.

While it might be a great choice for your family, don’t move forward with anything until you understand how to do it right. Setting things up properly can help you avoid unnecessary headaches down the road.

Is Family Financing Risky?

Any lender needs to realize that things can go wrong. Borrowers might not repay a loan, or they may otherwise behave differently than expected. If you hand out money, you might not get it back

When family is involved (and things are done informally), you face additional risks:

  • Relationships may suffer
  • Poorly set up deals may be illegal or disqualify relatives from certain benefits

How do you make sure that an intramural loan does not ruin your family? Document and discuss. Talk about every aspect of the deal and use written agreements. Consult with local attorneys to make sure a well-intentioned gesture doesn’t put anybody at risk.

Depending on the circumstances, family financing may be less risky than other solutions available. For example, if you were to co-sign for a loan, your relative can get money and build credit, but your credit can suffer if things go bad.

Family members are often (but not always) more forgiving than financial institutions. A "pause" might result in bankruptcy when borrowing from banks, but within a family the deal might not turn quite as sour.

Where is Family Financing Used?

Anywhere you want. Any time you can match somebody who has money with somebody who needs money, family financing is an option.

Some of the most common uses are below.

Home Loans - parents and other relatives often provide financing for young folks buying a home. While informal arrangements may work just fine, some families decide to formalize home loans to protect the lender and pursue tax benefits.

You want to do this right, but you don't have to do it all yourself. Work with local attorneys to draft agreements, and research online services that can handle everything for you.

Business - relatives may want to help fund a business. They may make loans, or take an ownership interest. Again, work with professionals familiar with family financing and local laws.

Student Loans - There are several ways to help relatives with higher education expenses. If you want to use a loan and improve the chances of getting repaid, formalize it. Some online services even facilitate the deal and specialize in loans for education:

Other Loans - You might use family financing for an infinite number of needs (personal loans, debt consolidation, medical bills, auto loans, and so on). If you want to be especially flexible, there are generic loan agreements you can customize as needed.

Talk to local attorneys and search online for family financing services that meet your needs. Many have flexible programs that provide agreements and handle logistics (such as automated electronic payment processing and credit reporting). Need a name to get started? LoanKin is just one of several firms in that market.