Family, Friends and Borrowing Money

Shakespeare warned that loaning money to a friend could be a good way to lose both money and a friend. What do you do when a relative or friend asks you for money, or you want to borrow money from them? Age-old advice says to tread lightly and be aware of both legal issues and potential hurt feelings.

Sometimes it is the 'First Bank of Father' (or Mother) that people turn to when they are in financial need, and family and friends have always been an option during a personal economic downturn. If done correctly, visiting this 'Bank of Family and Friends' can be lucrative, for both you and the ones lending you the cold hard cash you need.

Using a home purchase as an example, when it comes to buying a house, a private home loan, private mortgage or intra-family mortgage need not be much different from a mortgage you would get from your bank, credit union or other lender.

As with a financial institution, you would usually sign a contract and establish a monthly repayment schedule, with an agreed rate of interest, of course.

Your lender will put a 'lien' on the property and so have the right to legally demand full payment, if you 'default' on the loan.

The good thing is that you have legal rights as well. Your parents will not foreclose on your house just because you forget one of their birthdays, although it would be in your best interest to remember such details, if not for the sake of family relations, then for the sake of your future financial health.

This private mortgage arrangement can be of benefit to you in a number of ways. You would usually get a lower interest rate than you could find anywhere else, your repayment terms can be flexible and negotiated to suit both parties.

Such schemes can also benefit the lender in a similar number of ways. Firstly, by offering a higher return on their money; without paying the interest you would usually pay to your bank, you can still offer a better rate than they would get on most current savings accounts. Secondly a private mortgage repaid regularly will also generate a steady stream of income, which could be of value to the lender.

It would be wise to handle any and all family money transactions like a bank would: draft and sign a written promissory note, repayment schedule and supporting documents, then keep the lines of communication open at all times.