A reader worries about lending some money to her nephew.
QUESTION:
How does one go about lending money to family?
I recently inherited some money. It is sitting in the bank, gaining minimal interest.
I could potentially earn a higher rate of return if I agreed to lend money to family. It would save them having to arrange bank loans with hefty fees and charges. But this could cause problems if they have trouble paying me back.
My nephew is raising money to develop his business ideas. He is a clever lad and I have no doubt he will do well. But when I lent him money for a car it came back in dribs and drabs. I would like to make a more formal arrangement this time but don’t know where to start.
ANSWER:
While it is relatively simple to loan money to family, there are legal and relationship issues involved.
There is a strong conflict of interest here for you – wanting to support a family member, against the need to protect your money, and being able to regard this help as a business agreement where rules and obligations apply.
Your nephew’s business may prosper, it may not. You must be prepared to suffer loss.
If you decide to go ahead, it is possible to enter into a formal loan agreement contract, which should be prepared by a lawyer.
Your lawyer can guide you on the terms to include in the agreement, such as the period for repayment, interest charges and whether you secure your loan against an asset owned by the person receiving the loan.
Think carefully about the risks and any damage to family relationships you think may be caused by enforcing legal obligations. Also how they would feel if you lost your money?
Even though your loan agreement could be legally enforced if your nephew fails to repay you, you may find it difficult to put steps in place against him.
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