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Lending money to a family member
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Saying yes
For larger amounts, put the agreement in writing.

"The worst thing you want to do is ruin the relationship," says David Bendix, a certified financial planner and president of The Bendix Financial Group, based in Garden City, N.Y. "Problems usually occur when there's nothing in writing. Seven, eight years down the line, [people's memories] get fuzzy.

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Include the amount being loaned, the interest rate and the payback schedule. The borrower and lender should collaborate on the terms so it becomes a true partnership and each side buys into the agreement. And avoid balloon payments in favor of regular amounts that coincide with the borrower's pay schedule.

The lender should run it by a lawyer or accountant. Then both parties need to sign it.

"It's always good to have a witness and have it notarized, to make it as official as possible," Bendix says.

But asking for a written loan contract from a family member is like asking your intended to sign a pre-nup. The implication is "sure, I love you -- but ..." If you've decided the person is a good risk, and you want to make the loan, treat this as just another part of the deal.

And remember, your relative came to you for money, not the other way around. Here are four ways to approach the topic:

Blame the professionals. Your accountant or financial adviser absolutely insists on it. "It's not easy," Bendix admits. "Say, 'This is the way my adviser wants us to do the agreement.'" Let's hope, he adds, the borrower will be grateful for the loan and eager to demonstrate he or she is a good risk.

Blame the media. Mention that news report, online article or episode of People's Court that illustrated the damage interpersonal loans can inflict on relationships, and that the best way to prevent problems is with a written agreement.

Blame the IRS. "I'd love to loan you the money, but I've got to get something in writing in case I'm audited."

And last but not least effective, allude to a prior bad experience. Say something like, "Since I've had a problem in the past, (keep it purposefully vague), I learned that it really helps everyone to put a little something in writing."

And make sure the terms include a fair interest rate. If you have to pull the money from savings, you're losing that interest for the duration of the loan. Bendix recommends a market-based interest rate.

"Otherwise, it could be considered a gift," he says.

Keep a record of every payment, so there is never a question of how much of the loan has been repaid. Accept payments by check and give the borrower a signed receipt each time.

If you have the money but aren't sold on the way it will be spent, offer a loan to help with a different financial burden, says Bryck.

"If I can say 'I'm helping my grandchildren with their college education,' that might sit better than, 'I can't believe my 45-year-old son-in-law can't make the mortgage.'"

 
 
Next: " ... one of the cardinal rules of a family business ..."
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