Tips
When making decisions about money you need all the information you can get. So we packed this section chock full of it. You can find here:
- A savings calculator which compares the cost of getting your loan from a relative or friend vs. a traditional bank.
- A payment calculator which shows you repayment schedules based on the terms you select.
- Applicable federal rates set by the IRS for the current month.
- A neat map of interest rate limits for every state in the US.
- A selection of topics we think you’ll find relevant to considering a private loan.
And to get the learning started, below are a few tips.
Tips
Find an interest rate that makes you both feel good.
The interest rate is a percentage of the principal the borrower pays to the lender (in addition to principal) for the use of the lender's money. With private lending, the lender and borrower need to discuss and agree on the rate. The decision should consider:
Set the borrower up for success with an affordable repayment plan.
Virgin Money recommends that the borrower pay back the loan in installments—usually monthly, though quarterly or annual payments can also be selected—by setting up a repayment plan. The following standard types of loan repayment schedules are available (and can be computed on our payment calculator:
- Amortized
- Graduated
- Seasonal
You can also add a deferment period at any point and make a period interest-only.
A cocktail napkin is fun, but the IOU should be on paper.
Does it seem awkward or even rude to document a friends and family loan? Don't worry about it. Proper documentation is one of the best things you can do for a the loan and your relationship. Documents come in handy:
- To prove the loan is truly a loan, and not a gift.
- To resolve disagreements.
- To deduct a loss.
If the loan is greater than $10,000, refer to the AFR
Of course, lenders can charge 0%, and some do. But because the law caps gifts at $12,000 per person per year, larger transactions between individuals draw special attention from the IRS. To prove that a loan is really a loan and not a gift, the IRS recommends a minimum interest rate on loans between individuals, called the Applicable Federal Rate (AFR), which changes monthly.