But sometimes there is no other way than to borrow from a family member. If you extend a credit, when drafting the credit agreement, you take into account the following: If you know that you will have trouble repaying the car loan in a given month, call before the payment is delayed, Hirshman says. A family loan can often lead to a win/win situation for both parties, but the deal is not without risk. Here are seven tips from Hirshman and other personal financial experts on how to plan a car loan from family and friends while keeping friendships and family ties intact. Donation: If family members agree that a loan should not be repaid, it is considered a gift. This may be a choice if there are fears that a loan could jeopardize the relationship and the family member can afford to make the loan. Given the recent weakness in overall usage and the fact that most family members are not credit sharks, usury from family loans is unlikely. It`s important that the lender edits the transaction as a car loan and not as a gift, Kresh says. Otherwise, in the eyes of the Internal Revenue Service, the lender would be considered a donor and could have to pay gift tax if the money transfer exceeds $US 13,000, he says. Helps avoid risky loans: Family loans can help you avoid predatory lenders without a credit check and lenders who use unfair credit practices, such as for example. B the perception of prohibitive interest rates. A family loan is different from a gift that the IRS defines as a transfer of ownership or money to someone else, without expecting something of equal value to be received in return.
Market rates usually need to be applied to what you lend or borrow for your family loan to be treated as a loan. If you make a zero-rate or lower-than-market low-rate loan, make a gift in the eyes of Uncle Sam. All parties should agree on what should happen if the borrower can`t repay the car loan, and it should be documented in the credit agreement, Kresh says. The family member lending the money should consider the chances of not being repaid and the impact the loan may have on their own financial goals, such as retirement. A credit agreement is more comprehensive than a debt instrument and contains clauses about the entire agreement, additional expenses and the modification process (i.e.: How to change the terms of the agreement). Use a credit agreement for high-rise loans or loans from multiple lenders. Use a debt account for loans that come from non-traditional lenders such as individuals or businesses instead of banks or credit unions. Borrowers who can`t get car credit from a financial institution should consider using a peer credit company, such as Prosper.com or LendingClub.com, before borrowing from family members and friends, says Beth Frazier, founder of the Women`s investment group in New York. Risk of conflict: if the credit is not repaid or if the contractual conditions are broken, this can lead to disputes and a family relationship. .