Getting a loan from a relative usually sounds like a much better idea than going to a bank or a loan agency. There is usually no paperwork, credit score issues, interest rates, and maybe even rigid monthly payments to worry about. There will be no debt collectors breathing down your neck, and no penalties for late payments. Very ideal and attractive situation - Isn't it? Well... not so fast... Here are five of many reasons getting a loan from a relative can be a really bad idea.
1. Loans between Relatives May Come with Certain Conditions
After taking a loan from a relative you may realize they suddenly become the "boss of you." Through their concern/fear that you may do something that hinders you from repaying the loan, this relative may start trying to tell you what to do and what not to do, where to go and where not to go, who to hang out with and so on.
You may want to go on a vacation, but the relative thinks you ought to be working to pay them back instead of spending money to have some fun. All your monetary transactions suddenly come up for scrutiny, and you may even be advised to take a money management course. They may even ask to see an outline of your budget. In some cases the relative may ask that you find some collateral before they lend you the money.
2. The IRS Could Come Knocking
There could be tax complications if the relative charges you interest on the loan. The IRS is always around one way or the other to ensure that everyone pays taxes on money they make. Interest rates on loans are taxable even if that loan was from a relative. For sizable loans (such as for buying a car or home) dealing with high interest rates can turn out to be a paperwork nightmare.
The IRS will require a disclosure on how much you had to pay in interest and your relative will have to reveal how much was paid to them. Things may get so messy that you would have to end up using the services of a lawyer and an accountant to sort it out.
3. Strained Family Relationships
The fact is even the nicest relative can become your worst nightmare when it comes to money issues. Tensions can develop and escalate to the point that other family members become involved. Before you know it family functions can become a war zone.
4. Unclear Terms
The terms of the loan may not have been discussed and both parties have different ideas about the length of time for repayment. Loans with no strings attached can often be complicated if certain details are not covered. Your relative may expect you to repay the loan in a short time than you expect. In such cases it is hard to decipher who is wrong or right.
5. Missing Out on Valuable Life Lessons
As far as life's lessons and learning from them goes, sometimes it's best to swim with the tides than sail in the boat. Taking loans from a traditional source will help you learn how to fix your credit, manage money appropriately, and create an action plan.
About the author -
Written by Peter Coppola, an independent researcher and financial expert, he enjoys sharing his tips and insights on various personal finance blogs. Find out more about EasyFinance.com Loans, which are available online.
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