Admittedly, some liberties were taken with that headline and in the essence of clarity, this piece won’t address interoffice romance or any other salacious topics.
The topic du jour is personal loans, but not the ones people get from banks or other traditional lenders. We’re talking about loans made on a personal basis to family or friends. Specific to loaning cash to family, there are some tax benefits for both borrowers and lenders and it’s a strategy used by many affluent people to transfer wealth to heirs while mitigating tax obligations.
In essence, those aren’t really loans because in most instances, the expectation between the two parties is that the “loan” won’t be repaid. Assuming the loan is properly structured and legally documented, it can entitle the lender to up to $3,000 to offset ordinary income in a given tax year, assuming the loan turns sour.
There are other tax perks for borrowers and lenders and those can be explored with advisors and tax professionals. Indeed, there are some benefits tied to familial loans, but the risks may outweigh the rewards, particularly if legal documentation isn’t established before the money changes hands.
Loans to Friends, Family Cause Angst
A recent survey by JG Wentworth indicates that the average amount borrowed from a family member or friend is $297. Not a large amount, but if it’s extrapolated over the 51. 6% of Americans that say they’ve sought financial assistance from a relative or personal friend, that small figure balloons to $52 billion.
Adding to the case for NOT loaning cash to family and friends is that they’re likely to be slow when it comes to repayment, if they do so at all. While the average borrowing is $297, the average amount owed is $237, implying borrowers aren’t hurrying to repay their relatives’ or friends’ kindness. Unfortunately, slow repayment is more beginning than end to the negativity associated with these loans.
“46. 6% of those who have borrowed or lent money to friends and family said it caused ‘serious arguments or conflicts,” according to JG Wentworth. “The negative impact of lending or borrowing to friends or family has caused 75. 1% to say they’re no longer as close as they used to be. ”
It’s so bad that 48. 1% of those that have lent money to family or friends considered taking legal action to recover the bad debt, but they ultimately decided against it. Opting not to move forward with legal moves doesn’t imply the creditor suddenly turned benevolent. It’s likely more the result of the scorned party realizing the legal costs and time spent were likely to outweigh the recovered amount.
More Negatives Than Positives
As noted above, there are tax benefits to “loaning” money to relatives, but if that extension of credit isn’t being conducted for those purposes, the lender needs to prepare for the reality that they’re giving a gift, not making a loan.
In addition to significant likelihood of some or all of the loan not being repaid, the lender needs to prepare for the aforementioned strain and issues that could negatively affect or even end previously cherished relationships. That is to say the cons outweigh the pros in this form of lending.
“Even our closest personal relationships can become complicated when money is involved. When borrowing from friends or family, misunderstandings, delayed repayments or growing debts can often put strain on the relationship,” concludes JG Wentworth. “According to the people who have lent money personally to others, just over half (54. 5%) said they’ve had to ask more than once to be repaid, leading to an understandably uncomfortable conversation to have between friends and family. ”
