Don't Let a Loan Ruin a Relationship
Now that banks have tightened their lending standards, it is more difficult to borrow money -- even for those with strong credit histories. So what do you do if you need a loan? Many people are turning to friends and family to borrow funds. The Society of Louisiana CPAs (LCPA) warns that some smart steps are needed to prevent the loan from damaging a good relationship.
Consider Alternatives
Borrowers who fail to repay bank loans may face legal problems, but those who can't make good on loans to friends or family can be hit not only with legal trouble but also the loss of a personal relationship. That's why it's a good idea to think about all your options before approaching someone you're close to for a loan. Consider trying more than one bank, for example, or exploring borrowing possibilities at credit unions or other sources. It may also be possible to cut back on your spending instead of taking a loan or to postpone your plans for a big purchase until you have saved the money you need.
Get It in Writing
One of the potential pitfalls of a loan between friends or family is their informality. A handshake is a popular way to cement a deal, but a written document is a better idea for both sides. That's because problems can arise when the friend lending the money expects it to be returned within a short time, while the borrower believes he or she can pay it back over an indefinite period. When lending money to a loved one, it's often hard to insist on knowing when the loan will be paid or to ask for regular payments. To protect your relationship and your wallet, it's best to put it in writing. Write down the amount of the loan, when and how it will be paid off and if the borrower will pay any interest. This kind of promissory note
clarifies the borrower's responsibilities and can help prevent misunderstandings later. The note should be signed by both borrower and lender and each one should keep a copy.
Be Realistic
While written documentation is a great idea, remember that it will not prevent potential payment problems. That's why it's important for both people to be realistic before they enter into the deal. If you know that a loved one likely won't be able to repay you, for example, offer instead to help him or her solve problems by developing a monthly budget or working out a payment plan with creditors. If you are uncertain you will be able to repay a loan, consider asking loved ones to brainstorm as to your other borrowing options. Doing so may preserve your relationship so that it is still in force long after any money problems are over.
Give Honest Updates
If you borrow money from a friend or family member and find that you are unable to repay it as expected, let them know about the problem right away. Explain what went wrong and when you do think you'll be able to make good. It may be a difficult conversation, but your candor and consideration for the other person will go a long way in helping to preserve the relationship.
Consult Your CPA
No matter what your financial concerns, be sure to turn to your CPA for advice. He or she can help you find answers for your important financial questions.
For more tax and financial advice, visit the Public section of the LCPA's website at www.lcpa.org.
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Pursuant to IRS Circular 230 and IRS
regulations we inform you that any federal tax advice contained
in this article is not intended or written to be used, and
cannot be used, for the purpose of avoiding penalties imposed
under the Internal Revenue Code.
Copyright 2009 The American Institute of Certified Public Accountants.
