Family Loans: How to Borrow From and Lend to Family

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What is a family loan?
What are the tax implications of a family loan?
Pros and cons of family loans
Pros
- Easy approval: There's typically no formal application process, credit check or income verification when you're borrowing from family or friends. Traditional lenders often require documents such as W-2s, pay stubs and tax forms as part of the loan application.
- Low costs: Since the loan is coming from a loved one instead of a for-profit corporation, you may get a loan at a much lower interest rate than what a bank, credit union or online lender might offer. Family members may also be unlikely to charge late fees or the upfront origination fee that lenders sometimes charge.
- Hardship options: Family members may be more lenient than other lenders if you encounter a hardship, like a job loss or illness, letting you pause or suspend payments for a period of time.
- Helps avoid risky loans: Family loans can help you avoid payday and other high-interest lenders that charge unaffordable rates.
Cons
- Potential for conflict: If the loan isn't repaid or the terms of the agreement are broken, it can strain a relationship. The family member or friend loaning the money must consider the chances of not getting it back and whether the loan will impact their own financial goals.
- Tax implications: As detailed above, if the loan is $10,000 or more, the lender may need to charge interest and report that interest on their income tax return. For large loans, the lender may need to file a gift tax return.
- No credit building: Payments toward a family loan aren't reported to the three major credit bureaus, eliminating the opportunity to improve the borrower’s credit. Good credit scores can help you qualify for credit in the future, like a mortgage or car loan.
How to make a family loan agreement
- The amount borrowed and how it will be used.
- Repayment terms, including payment amounts, frequency and when the loan will be repaid in full.
- The loan’s interest rate, if applicable.
- If the loan can be repaid early without penalty, and how much interest will be saved by early repayment.
- What happens if the borrower stops paying, whether it’s temporarily due to an emergency, or entirely.

Alternatives to family loans
Article sources
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- 13. Center for Responsible Lending. Unsafe Harbor: The Persistent Harms of High-Cost Lending. Accessed Jun 6, 2025.
- 10. Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt. Accessed Jan 27, 2025.
- 15. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Apr 8, 2025.
- 7. Consumer Financial Protection Bureau. What is a payday loan?. Accessed Apr 4, 2025.
- 17. The Pew Charitable Trusts. Payday Loans Cost 4 Times More in States With Few Consumer Protections. Accessed Apr 4, 2025.
- 9. Federal Reserve. Military Lending Act. Accessed Apr 4, 2025.
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