Keeping it in the Family

In today's low interest rate environment we have found that doing intra-family loans can make more sense than ever IF done properly.
Savers (meaning parents and grandparents) are being punished by low interest rates on CD's and bonds while borrowers (meaning children, grandchildren, nieces, nephews...) are having more trouble than ever getting approved for loans.  We have 3 rules we apply when considering a private loan:
1)  If you don't know the borrowers then be sure to get all the paperwork done and documentation clear.
2)  If you know the borrowers then DOUBLE IT.
3)  If the borrowers are family then TRIPLE IT.

Promissory notes and mortgages are often standard forms that describe an agreement.  I believe they are severely lacking in helping people understand the heart of the matter.  There are also adjustments that can be made to customize the agreements to meet the needs of a unique situation--especially with family. 

For Example--one family lender offered to defer payments from their daughter for the purchase of a home as long as she was still in school as a full-time student.  Another family agreed that interest only would work fine and the balance could be accounted for in their estate.  Another one allowed payments for a loan to start a new business to be deferred for one year while things got going. 

Clear direct communication of the intention of the loan, along with proper documentation, and often having a third party collect payments and track the status are all key to improving the chances of a successful outcome. This strategy has also given families the opportunity to make more interest for the lender, make money available to borrower and allow the family to teach good money skills including what can happen when things don't go as planned. 

We have had some situations go differently than planned.  One daughter who signed her house over to her parents in lieu of foreclosure sat in the conference room and cried saying "Getting this money was a blessing and knowing my parents will not be hurt is a blessing.  I know this is the right thing to do and I am greatly relieved to handle it this way."  She has gone on to completely re-write her life and the family is better for it. 

I know it is commonly frowned upon to mix family and money but in our experience--done properly it has repeatedly been a blessing for all involved.