11/21/2011 3:06 PM ET|
How to take a car loan from family
If you are considering using friends or relatives as a bank of last resort, these 7 tips can help you protect the relationship.
If you need to borrow money for a car but your credit isn't great, the people closest to you may be more willing than a bank to lend you money. But borrowing from family and friends can lead to problems if you're unable to pay back the car loan, warns personal finance expert Susan Hirshman, the author of "Does This Make My Assets Look Fat?"
However, when borrowing from family or friends is your only option, you can take steps to help smooth the process. "The goal is not to jeopardize the relationship," she says.
Here are seven tips from Hirshman and other personal finance experts on how to plan out an auto loan from family and friends, while keeping your friendships and family ties intact:
Make sure the key terms of the auto loan, such as dates for repayment, amount and interest charges, are spelled out in writing and agreed upon by all parties, says Michael Kresh, a certified financial planner and president of M.D. Kresh Financial Services in Islandia, N.Y. Borrowers can use online search engines for promissory note templates, he says.
Getting a promissory note in writing adds formality to the car loan process and limits personal stress on all parties, Kresh says. "As a borrower, the tendency may be to pay the family member last, after all the other monthly bills are covered," he says. "Having written documentation can help the borrower view the loan with the same sense of importance as their other obligations."
Understand tax laws
It's important for the lender to record the transaction as a car loan and not a gift, Kresh says. Otherwise, the lender would be considered a donor in the eyes of the Internal Revenue Service, and could owe gift taxes if the transfer of money is greater than $13,000, he says.
Another tax concern to consider is the interest charged on the car loan. "If the lender doesn't charge interest (at market rates), then the IRS may consider the exchange a gift," Kresh says.
There also can be tax implications for borrowers who don't repay auto loans from relatives or friends. The IRS may consider a forgiven loan as income and try to collect income tax, Kresh says. His advice for all parties is to talk to a tax expert before making any large-scale exchange of money.
Investigate peer-to-peer lending
Borrowers who can't get an auto loan from a financial institution should consider using a peer-to-peer lending company such as Prosper or LendingClub before borrowing from family members and friends, says Beth Frazier, the founder of The Women's Investment Group in New York City.
These sites match borrowers with individual lenders who may be willing to lend money that could be used to buy a car, Frazier says. But because the money is coming from a third party and not a family member, debtors don't have to face their lenders at Thanksgiving dinner.
The key to getting a loan from a peer-to-peer lending site is to persuade potential investors to fund the objective. "On some sites, you have to be able to sell your story. That means explaining why you need a new car, and why it's necessary. If your story is not convincing, the lenders may not lend you any money," Frazier says.
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