How to Loan Money to a Relative

Loaning money to a relative is a perilous task. While loaning money to a stranger is a relatively straightforward business transaction, a loan to a family member can easily result in blame, lost money and hurt feelings. If a stranger fails to repay a loan on time, you can simply hire a collection agency or take him to court--but that isn't so easy if the relative is your brother or your aunt. When considering a family loan, take a few basic precautions.

Instructions

1

Consider your relative's finances. Before agreeing to the loan, consider both what your relative wants the money for, and her current financial situation. If you don't know, ask. This will give you a better idea of the odds of getting repaid. If it doesn't look promising, keep the loan amount low.

2

Negotiate terms. If you agree to loan your relative money, you shouldn't consider it inappropriate to negotiate details of the loan, especially for larger sums. While the relative might balk at paying interest or putting down collateral, it's your money--so don't be afraid to call the shots. However, if you do charge interest, don't go much above the prime rate.

3

Define a payment plan. The worst thing you can do is leave the repayment timeline indefinite. While you're thinking, "six months," your relative might be thinking, "six years." Hash out a payment schedule that you can both live with.

4

Put it in writing. According to Bankrate.com, you can save a lot of trouble, both legally and emotionally, if you put the agreement in writing. If the relative is hurt, blame it on another party. Tell her your financial adviser absolutely insists--or that the IRS might audit you.

5

Keep it quiet. After you've agreed to the loan, insist that the relative keep it between the two of you. If he goes blabbing to other family members, this could create all sorts of familial conflicts--or more likely, a whole swarm of relatives knocking at your door.