Skip To Content
Blog Get a Quote

The no-stress way to borrow and lend money to your family

Borrowing and lending between relatives can be unexpectedly emotional. Here are some tips for setting healthy boundaries and implementing damage control.

Middle-aged, retired couple sitting together laughing outside on a dock over a lake

Life is full of expensive situations where you might find yourself in need of some extra cash to help you achieve your goals. Enter family loans. Whether you’re starting a business, getting ready to welcome your first child, looking to pay off your student loans, or buying a home, a loan from a family member could be a good option for both of you.

Of course, borrowing from a family member can also be emotionally complicated. After all, you’re unlikely to sit down with your credit card company on Thanksgiving. Familiarizing yourself with common best practices for a family or personal loan (and maybe sharing this article with your family member, too) can help put you both on the same page. Of course, since it’s family, you can’t guarantee that disagreements won’t pop up — but having some guardrails in place may mean the disagreements will continue to center on the usual pumpkin versus pecan pie and not on financial matters.

How a family loan works

A family loan is an agreement between one family member who wants to borrow money and another family member who is willing to loan it.  A family loan can be mutually beneficial (and drama free) in a few different ways.

For the borrower:

  • You might receive a lower interest rate from a family member than you would from a bank loan.
  • Your family member might not care about your credit score
  • Your family member might be more flexible with  repayment terms than a bank

For the lender:

  • You can help out a family member who is in need
  • You can agree on repayment and interest terms that are mutually beneficial
  • You can charge an interest rate that is better than what you’re earning in your savings account even if it’s still an extremely good deal for the borrower

Life insurance needs aren't one-size-fits-all.

Calculate your needs

How to do a family loan

Weird, cool, wonderful, annoying, or even tragic things can happen in the course of a year, and sometimes, it’s easier, faster, and more comfortable reassuring to rely on family members than on anyone else. But even though your family may have incredibly tight bonds and, with an unspoken understanding that all family members have each other’s backs, following some basic borrowing rules can help you avoid misunderstandings. Follow a few guidelines, whether you’re the borrower or the lender. You’ll be glad you did.

Understand interest rates

Figuring out a “fair” interest rate can be tricky. It’s to the borrower’s advantage if the interest rate is set below the average rate from a traditional bank, but not so low that it could be considered a gift. Thankfully, the IRS is here to help out. The IRS sets the Applicable Federal Rates (AFR) which provide a guideline for how much interest should be charged for the loan to be considered a loan and not a gift (a large gift might trigger gift tax for the lender).

If you want to make a zero percent loan, which many families do, you will need to calculate the interest anyway and pay taxes on it if you want to keep your tax house clean.

Haven Life: Life insurance that’s actually simple

Get our newsletter

There’s more great content where this came from.

Create a contract

A contract will protect you both. You can create a contract using an online service. However, if you’re borrowing or lending a substantial sum of money ($100,000 plus), consider hiring a lawyer to draft a contract that is tailored to your loan. The contract should spell out:

  • Loan amount
  • Interest rate
  • Term length
  • What happens if the lender or borrower dies or is disabled
  • Whether any collateral secures the loan

Loop in an accountant

Consider talking with your accountant to make sure you’re creating a contract that is fair and that considers all IRS requirements before the contract is signed.

Set up hands-off collection

For a larger loan, consider hiring a loan servicing company. Handling all the details of the loan can be complicated and certainly headache inducing. A loan servicing company can help you manage the loan easily. Make sure you research each company before you hire one and pay special attention to their fees.

For a smaller loan, get an app that will allow you to set up automatic payments. Google Pay can remind you when it’s time to pay or request money.

Haven Life: Life insurance that’s actually simple5 Star Ratings

Easy + Simple + Affordable

“I'm so happy I chose Haven Life for my policy needs. The entire process was quick, easy, stress-free and convenient. Their customer service is top-notch.” - Sandra

Learn more

Know the rules about gifts

Family loans and gifts might be reportable to the IRS.

If you’re lending money, it’s important to be aware of the gift tax rules. Giving money might not be in your best interest as the lender, because if you give more than $15,000 to any recipient in 2018, your gift would be subject to gift tax by the IRS. Consider talking to your accountant before giving a gift to make sure you’re playing by the rules.

Family and business can be a successful combination

Family loans can be a huge success, and each party involved can walk away as a happy camper. Many of my clients over the years have borrowed money from a relative, and it’s been a fantastic way to provide funds to achieve their money goals.

As long as the borrower and lender can agree to terms, borrowing money from a relative can save you a lot of money in interest charges and can provide flexible terms for a repayment plan that works with your budget.

As the lender, lending money to a relative can be a source of pride knowing that you’re helping your relative get one step closer to financial success. With a few safeguards in place, borrowing money from a relative can be an effective strategy to work toward financial goals.

Haven Life: Life insurance that’s actually simple

Great News...

Peace of mind might be closer than you think.

Learn more

Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER®  professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.

Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

Default author headshot

About Shannah Compton Game

Read more by Shannah Compton Game

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit:

You might also like

Get our most-read stories, twice a month

.newsletter-msg-success, .newsletter-msg-error { display: none; }

What our customers are saying

Sign up for our newsletter

Get our most-read stories, twice a month

Thanks for signing up. See you in your inbox soon.