Loaning money. Sometimes, you may run into a loved one that really needs the money, while others may try to take advantage of you.
Family and close friends are the most vulnerable to giving out “loans” that are not in their best interest, as there is an estimated $184 billion being given to friends and family in the United States.
For those of you that feel obligated to help but are not financially secure, or have the age-old advice of “don’t loan money to friends or family” playing round in your head, you may be wondering how to loan money to someone close while keeping your financial status intact?
If you decide otherwise, this is your guide.
Have It Documented
If you want to do this on the books, the best recommendation is to get the loan agreement in writing. Then, the person you are lending money to will be legally obligated to pay you the money back rather than relying on your compassion to do it without a contract in place.
If you go this route, you do run the risk of ruining your personal relationship with that person because they may feel you do not trust them to pay you back but you do get a lot more guarantees to protect yourself.
One part of that documentation would be to have a record of you sending that person the money on a specific date. You can do this with wise money transfer and learn more about that route in the link.
Know Tax Rules
The next thing that you need to be aware of is that the IRS can tax you on gifts for friends or loved ones if you give them money on a “loan” that you should have been charging them interest on.
Luckily, for most people, this does not apply to them because that usually needs to total over $5 million in their lifetime to get taxed. But, you need to keep it under $10,000 annually if that money is going to be used for a child to invest it in stocks or bonds.
Also, it would need to be kept under $100,000 if the same person made $1,000 or less in a year.
For the IRS, the annual gift limit is $14,000 per individual, so you need to keep this in mind if you are making a large loan to someone close to you.
Think of Pros and Cons
This last part comes down to personal relationships because giving money to someone close in financial trouble has its advantages and disadvantages such as helping someone you truly care about get out of a bad situation.
However, it does open up the door for other people to ask you for money without receiving any financial benefit in return. A lot of people that lend money to someone close to them like to treat it as a gift to preserve the personal relationship because it means that they accept from the beginning that that person may not pay them back.
Learn More About How to Loan Money
Learning about how to loan money can be very beneficial for someone with a kind heart and who is financially wise because they can do so while protecting their own interests. But, at the end of the day, you need to decide what is more important before putting yourself in that position.
Do you want to know more? See our Business and Finance section.