Looking for money? Aren’t we all? Whether you’re trying to finance a new business start up, consolidate some debt, or looking to get into your first home, there’s an option that you may not have considered before: borrowing from friends and family.
Now, I know, it’s not wise to mix money and relationships (look at the divorce rate in the US and one of the top reasons is money), and I would rarely suggest it to the average Joe. But with the mortgage crisis the way it is and you looking to be frugal and creative with your resources, the idea of borrowing from someone you know might be worth another look.
You have to be committed.
First of all, don’t consider this option if you do not 100% trust yourself to pay the loan back. If you have a history of going back on your word, or starting things you can’t finish, pulling friends or family into your mess is not worth it. Not worth it. If you can’t honestly trust yourself to pay the loan back as promised, don’t go into debt. I don’t care what the interest rate is, or what a deal you’re getting, don’t go into debt.
That being said, if you need a creative source of money to invest in a home or an income producing asset, you might want to consider a personal loan.
The problems with personal loans.
The problems with personal loans are generally tied up in the people: they have different memories of how much and when the loan was to be repaid; they fail to nail down an interest rate; they forget to make payments; they argue over late fees. No wonder personal loans are generally trouble.
The best way to make or take a personal loan.
However, if you have (or are yourself) a willing lender, you can make the process much easier, and safer by making the loan legal with a promissory note. We took advantage of owner financing when we bought some property a few years ago. A local title company drew up the papers and processes the monthly payments. They take care of all the tax documentation for both the borrower and lender. In fact, we have no contact with the lender, and he has no headache with paperwork coming from this loan.
Protect yourself.
Besides the convenience, there are several advantages to putting the loan officially on paper. First of all, with the terms of the loan legally recorded, both parties are safe from the other “forgetting” the original agreement. This will, in theory, save many a personal relationship from the obvious pitfalls of a personal loan. Secondly, the IRS requires lenders to pay tax on interest income for a loan over $10,000, that means more paperwork. Third, if the borrower does default on the loan, the lender can prove it and take a capital gains loss on his/her income taxes.
Put space between the two of you.
If you use a service as we are with our title company, they will, for a small monthly fee, take care of the IRS forms and process the payments. Not only does this save you time working on paper work, it puts some “space” between you and and your friend or relative. The title company will charge the late fees, if needed and make the collections phone calls if it comes to that. The lender then can’t give the delinquent borrower a break as all the terms of the loan are on paper, and therefore legally binding.
If you’re not comfortable finding a local title company, you can find these services on the web. www.virginmoneyus.com has a particularly nice site with many options to really tailor the loan to your needs. Even if you don’t need a loan, I would recommend checking out this site as it is just another example of Richard Branson’s brilliance when it comes to filling people’s needs and making money doing it.
P.S. Mark says this post “reads like sales copy on a loan site” and seems to be keyword stuffed. It was written as neither of those; I just thought personal loans were something our readers might be interested in. Anyone want to chime in on this? Please do.
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