Now that the federal government has shut down (with no signs of the two parties reaching an agreement), many furloughed government workers and private sector ones, too, have been impacted. For those who find themselves in a financial pinch, what should you do if a family member or friend offers to lend you money to help you through the no-paycheck-period?
It’s great to have people who care about you AND who have a bank balance. But before you pocket that extra cash, here are some tips that will put both you and your lender at ease regarding the loan.
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- Agree on the amount. Both of you should agree on a specific amount so there is no confusion or mixed signals.
- Put it in writing. Treat this loan just as you would a bank loan – a written promissory note makes it clear that the lender doesn’t intend to gift the money and you, the borrower, intend to pay it back. It might seem like an unnecessary step when you’re borrowing from someone close to you, but having the document will help you all avoid any frustration should unforeseen complications arise. Wikihow has a thorough article on how to write a loan agreement.
In general, your promissory note should include:
– Names and addresses of the borrower and lender
– Amount of the loan
– Interest rate (if applicable)
– Payment terms (see below) - Payment terms are difficult to determine when you don’t know when the government paychecks will start rolling in again. On the other hand, the media will make sure everyone knows when that happens, so your lender will know too. I recommend including a statement in your document indicating that you will repay the loan as soon as you receive your back pay from your government employer.
- Interest is recommended on formal loans, but friends and family often bypass this. Interest terms are up to you and your lender. If you both agree you will pay interest on the loan, determine the amount (according to fitsmallbusiness.com, a typical interest rate on a personal loan is often in the 7%-12% range). Note that interest rates are shown as annual rates. For example, if you borrow $2,000 at 8%, that’s $2,000 x .08 or $160; then you divide that amount by 12 for a monthly rate, or $160/12 = $13.33 per month.
Sometimes people don’t want to charge interest on a personal loan. If paying interest seems icky or impersonal, you could accompany the loan payback with a nice gift.
Here’s another complication to keep in mind. If you pay interest on the loan, the lender is required to report that interest as income on his or her tax return. If the lending gets into big bucks, or if there is any possibility the loan won’t be repaid, the IRS would like to step in and share some of the proceeds. The professional service solutions provider LMBC has a blog post that explains in detail how to report interest and how to determine when a loan is actually a gift.
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