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LOANS 101 (18)

A friends, family and businesses relationship loan is a type of Peer-to-Peer lending (P2P). These types of loans are part of a fast growing trend of people lending/borrowing money to each other without the intermediary of a bank or financial institution. Often P2P loans are unsecured loans, which means the lender does not require the borrower to pledge assets or belongings as collateral.

Category: LOANS 101

Treat a personal loan from a friend or family member like you would any other loan. You must be prepared to meet all of your obligations on time until the loan is paid in full. A private loan just means a loan from someone other than a bank or lending institution, and the agreement is drawn up between the two of you. The fact that you may know your lender/borrow well should not change the responsibilities associated with any loans. A loan agreement and repayment schedule should be drawn up to avoid any misunderstandings or conflict.

The main purpose of a loan contract is to define what the parties involved are agreeing to, what responsibilities each party has and for how long the agreement will last.

Category: LOANS 101

While a loan agreement between family and friends may not be necessarily a legal document, it does protect both sides if the matter goes to court.

Formalising a loan agreement just means putting in writing something that may have been talked about. This is to clearly identify the relevant interest rates, loan terms and conditions.

Before committing to a loan, think about how realistic the repayment schedule for the recipient of the loan is. Consider multiple ways to safeguard the loan from becoming embroiled in emotions if loan is from a known party. Ultimately, both parties should be aware of the obligations and responsibilities associated with taking on the loan. It is wise to draw up a contract between parties to protect against any disagreement.

Your loan agreement should include how much the loan is for, the interest rate, what the money is to be used for, clear repayment terms, what will happen if you fall behind or miss a payment (such as a late fee), and signatures from both parties.

A loan agreement should describe the loan terms, terms of repayments, interest, what happens if the borrower misses a repayment, the relevant dates, and persons involved. Each person involved should have a copy of the loan agreement, or have it electronically. This written agreement is legally binding.

Yes, you can! The way to build an interest only loan in the Credi platform is to enter the same amount in the fields ‘loan amount’ and select ‘balloon amount’, as well as entering your interest rate of course. The periodic repayment schedule will then reflect interest only payments with the final payment being the loan principal.

While you can give an interest free loan to a family member, financial planners don’t endorse this practice. To minimise pain and conflict, financial planners advise charging interest on the loan, treating it like any other loan. A minimum amount of interest for example, is an amount that will ensure that repayments keep up with inflation. Putting together a contract such as Credi’s loan agreement that leaves out any room for assumptions. Giving an interest free loan to a relative or friend might also fall under the tax definition of a ‘gift’, which has its own rules and regulations you would have to check for your locality.

When considering committing to giving or receiving the loan, think about how you or your friend/relative will pay back the money. Consider the realities of your relationship with the person and ways can you safeguard yourself from anything going wrong in relation to money. Do you have a loan contract and a reliable way to track repayments without emotions being entangled?

The interest rate for a personal loan to give should be determined by the length of repayment and any national government approved interest rates for family loans. The annual limit for tax-free gifts to family members in Australia is $14000, so especially when you loan is beyond that, should you charge interest.

Yes. Charging interest on a loan is important because it sets up the agreement as something other than a gift or a handout. Interest can also make up for differences in inflation between the start and the end of the loan. The interest rate for a personal loan to give should be determined by the length of repayment and any national government approved interest rates for family loans. The annual limit for tax-free gifts to family members in Australia is $14000, so especially when you loan is beyond that, should you charge interest.

If the loan is formally agreed upon in writing with a plan to repay it by the borrower, it does not interfere with any taxation. However, if a loan is written off, it counts as a ‘gift’ on behalf of the lender, which does have tax implications. For the borrower, if the loan is forgiven, at that point it becomes classified as income and must be declared for tax purposes.

You can forgive a loan from a family member, however this does affect your taxation. Check your local area’s tax rules about this. For example, in many places a gift over $15,000 incurs a tax for the giver which must be accounted for.

Most loan contracts define clearly how the proceeds will be used. There is no distinction made in law as to the type of loan made for a new home, a car, how to pay off new or old debt, or how binding the terms are. The signed loan contract is proof that the borrower and the lender have a commitment that funds will be used for a specified purpose, how the loan will be paid back and at what amortization rate. If the money is not used for the specified purpose, it should be paid back to the lender immediately.

A breakdown in a personal relationship when you have financial commitments can be tricky to navigate. You can get free legal advice if something goes wrong, otherwise try to maintain a civil relationship and deal with your mutual obligations. Using Credi, or some other loan documentation service will protect both of you if the relationship does break down.

Making a loan agreement just means that there are safety nets for both parties involved in the loan. This does not mean that there is no trust, but rather, a clear definition and set of expectations around the loan that you are both happy with and are willing to follow. This shows that you value your relationship and can safely know that a loan will never come in between your friendship or relationship together.

Category: LOANS 101

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