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Best way to make a personal loan to a family member official

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  • Best way to make a personal loan to a family member official

    I know, I know. It's better to give cash to a family member / friend rather than a loan but he won't accept it as a gift because it's a large sum of money. What is the best way to draft a contract so it's official? Should I just draft something up myself and get it notarized? Legalzoom?

  • #2
    I think either would be fine to "make it official." Notary would be much cheaper and is the route I would go/have gone. I'm not sure which would hold up better in court but if you would have given the money as a gift anyway then maybe that doesn't matter so much on your end.

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    • #3
      Fine. Do the loan. Do some paperwork. But in your mind, consider it a gift and don't loan more than you would gift. And be sure to report the interest on your taxes.

      Since it's an amount you would gift anyway, I would draft up the contract myself and skip the notary and the attorney.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #4
        He originally asked if he could take out a personal loan under my name but I didn't feel comfortable doing that (I don't want to have to worry about him missing payments and ruining my credit not to mention the lowest rate I could find on a personal loan was 5%). So I figure I'll just have to cut back on my student loan payments for a few months and just give it to him in cash. Since this is going to be an interest free loan, I'm guessing I don't have to report anything?

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        • #5
          PNWskindoc - I need a loan. Since you are doing interest free, i'll throw in 3% interest for you (hey beating current inflation). Deal?

           

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          • #6
            Haha, maybe if you had the same last name as me!

            Unfortunately, not only is this an opportunity cost for me but I'm also eating quite a bit in interest for him because this is all extra money I was going to be putting into my loans.

            Tough situation for me to be in because I still have >300k in student loans but at the end of the day, I think I'll be fine-- it'll just take a few more months for me to be debt free. I just try to put things into perspective and remind myself how fortunate we are as physicians to make the money that we do and be in the position to "loan" someone a hefty five figure amount on one day's notice.

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            • #7
              Trick question.  There is no good way to loan money to family members.  And if a family member is asking for your money, you've already lost whether you give it to them or not.

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              • #8
                Generate a Promissory Note.  (Google for examples).

                Without it, an un-repaid sum > $14,000 could be considered a gift and subject to gift tax

                Family gets paid back last-- every other creditor comes first, because family "understands."  So as everyone else has commented, you can certainly hope for the best, but prepare mentally for the worst, and in fact expect it:  the loan repayment could get postponed.... indefinitely.

                 

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                • #9
                  I have loaned money to my brother.  I never expected to be repaid but he did about 5 years later with interest.  I considered loaning money to my nieces husband but in the end did not. This turned out to be wise because they ended up divorcing.  These conversations just add to family tensions I think.

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                  • #10
                    Obviously, I think you should not do this especially since you have your own loans. Think really hard about this - is this a band-aid type fix for this family member who will only ask you for more money in the future?

                    If you feel compelled to do this - make it official, draft up a loan contract and he/she must pay the min. interest in the IRS guidelines  (https://www.nationalfamilymortgage.com/afr-rates/) or you open yourself up for IRS to come after you. Especially if the amount is over the IRS gift tax amount (14k or 28K if you are married).

                    The worry here is that this will never end. And if other people find out you are doing this, you may get more interested borrowers. You've been warned.

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                    • #11




                      He originally asked if he could take out a personal loan under my name but I didn’t feel comfortable doing that (I don’t want to have to worry about him missing payments and ruining my credit not to mention the lowest rate I could find on a personal loan was 5%). So I figure I’ll just have to cut back on my student loan payments for a few months and just give it to him in cash. Since this is going to be an interest free loan, I’m guessing I don’t have to report anything?
                      Click to expand...


                      Oh, that sounds bad. You owe $300K in student loans. I think you should be honest with him. Tell him you have a negative net worth, are worse than broke, and need to dig out of your own hole before you can help him.
                      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                      • #12
                        http://www.marketwatch.com/story/how-to-lend-money-to-a-relative-without-getting-whacked-by-the-irs-2015-05-12

                         

                        https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/IRS-Tax-Rules-for-Imputed-Interest/INF28705.html

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                        • #13


                          Oh, that sounds bad. You owe $300K in student loans. I think you should be honest with him. Tell him you have a negative net worth, are worse than broke, and need to dig out of your own hole before you can help him.
                          Click to expand...


                          I was thinking the same thing. Why loan when you have $300K in debt?. Unless it is a life or death issue with my immediate family member I would not do it.

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                          • #14




                            Haha, maybe if you had the same last name as me!

                            Unfortunately, not only is this an opportunity cost for me but I’m also eating quite a bit in interest for him because this is all extra money I was going to be putting into my loans.

                            Tough situation for me to be in because I still have >300k in student loans but at the end of the day, I think I’ll be fine– it’ll just take a few more months for me to be debt free. I just try to put things into perspective and remind myself how fortunate we are as physicians to make the money that we do and be in the position to “loan” someone a hefty five figure amount on one day’s notice.
                            Click to expand...


                            In my opinion, you cannot afford to loan others money. Your physician salary is far from guaranteed.

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                            • #15
                              Whoa.  If you owe a third of a million dollars in student loans, you are in no position to be loaning money.  Sorry.  Tell your friend/family that you reached out to your advisor (WCI forum) about how to loan him the money (you really really thought you could help), but instead the advisor forbid you to loan anything til your loans are paid off in 20 years (let's ignore the fact that you will be paying down faster).  If this loan is legit despite a bank not wanting it, perhaps he could look at crowdfunding.

                              Not saying this is your situation, but over and over people try to take advantage of the "rich" doctor asking for money, favors, not to mention doctor-pricing, etc with zero concept of student loan debt, opportunity cost of 7-12 years of training, etc.  I know that I'm preaching to the choir, sorry.

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