Loans

Thinking about offering a personal loan? Or taking one?
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Rocket Lawyer On Call® Attorney

Lend or borrow money FAQs

Loaning and borrowing money can be risky. Either you loan and risk losing money, to maybe even a friend or family member, or you take on debt that adds to your already existing financial problems. Whatever side of the loan you are on, it's important to make smart, informed choices.

How do I loan money to friends or family?

Most financial advisors will tell you not to lend money to friends and family; however, if you feel the need to help your friends and family you should make sure you protect yourself the best you can. First, never loan money you cannot afford to lose. Second, start by making a Loan Agreement that both you and your family member sign willingly.

Tips for loaning money to family and friends:

  • Do not lend money you cannot afford to lose
  • Try alternative methods first (help them sell items, find work, move, or start a fundraiser)
  • Define clear payment terms (don't be vague about when repayment is expected)
  • Set affordable payments rather than an amount they cannot reasonably afford
  • Consider holding collateral
  • Consider charging interest
  • Be mindful of due dates and remind them if needed
  • Consider paying their financial obligation directly rather than just giving them the money

Should I charge interest on a personal loan?

Why not? Especially if the loan amount is over the a tax-free limit amount of $14,000. The IRS may, on larger loans (or "gifts"), charge taxes for interest you could have collected on the loan. So, you may as well charge interest. Charging interest also shows the borrower that you are taking the loan agreement seriously. Our Loan Agreements include the option to charge interest and can create an amortization table for you.

How much you decide to charge in interest is up to you. Most financial advisors recommend five to ten percent. In many states you may not be able to charge what might be considered excessive interest. High interest rates may be considered predatory and bad for the consumer, even in regards to personal loans. If you want to charge more than ten percent, make sure your state laws do not prohibit it first.

I need to borrow money, what type of loans should I avoid?

If you can avoid borrowing money in the first place you are better off in the long run. But if you need to borrow money, you should seek the best possible terms.

Most expensive (or risky) types of loans:

  • Payday loans
  • Car title loans
  • High interest car loans (often from the lot)
  • Credit card cash advances
  • Pawn shops
  • Friends and family (risky to the relationship)
  • Refund Anticipation Loans (RALs)
  • Cash advances

Best and most affordable loan options:

  • Low interest personal loan from your bank
  • Low interest personal loan from a loan company
  • Zero interest, short-term credit cards usage
  • Second mortgages
  • 401(k) loans (although you may lose some potential retirement gains)
  • Small Business Association (SBA) loans for starting or expanding a business