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Do you lend money to your friends?

Can you lend money to family and friends with an interest rate?

  • I live in New York State and I was asked by a family friend to lend them a large sum of money. Since the sum is large, I was wondering if I could charge him interest to assure that I ...show more

  • Answer:

    Yes, but I'm not sure why you think charging interest makes it more likely to be paid back. If this is money you can't afford to lose, I would strongly suggest you to think twice about lending it. A lot of friendships and family relationships have broken down when money hasn't been repaid or the other side insists it was a gift and not a loan. Putting it in writing establishes it is a loan but do you really want to have to sue a friend or family member if it's not repaid? You should not be their banking service, have them borrow money from a lender that does it especially if it's a "large" sum of money.

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Charging interest does NOT insure that you get paid back. The only way you can protect yourself is to make a written contract for the loan.

src50

Tax law requires you to charge interest. If you don't, the law imputes the amount and makes you add it to your income anyway. See IRS publication 550 for the rules. Type in AFR in the search box to get the current interest rates.

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Yes, get a contract and decide upfront what you will do when they don't pay. Make sure you have all the paperwork in order to garnish the pay or put a lien on the car or business or whatever they are using your money for. Treat it like any other loan and make sure they can afford to pay it back and are actually going tom check credit rating and verify income like anyone else would do to make a loan. When they don't pay you might have to go to court to get a judgement so make sure you write that in the loan docs that they have to pay cost of collection.

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