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Family loans: How to borrow from and lend to family

Weigh up the pros and cons and learn how to set up a loan with a family member.

A family loan is when you borrow money from your family and pay it back later. You don’t need to worry about strict eligibility criteria, and your family could even make money on interest.

Ideally, a family loan arrangement benefits both parties, but it can still come with some potential drawbacks. A big one: If you’re unable to pay back your family – or you think the rates and terms are unfair – you could inadvertently stir up serious drama. You need to carefully outline the terms and know the tax laws before you agree to borrow from or lend to family.

How to set up a loan with a family member

Asking your family for money can be a delicate situation. Before getting started, consider how borrowing might affect your existing relationships. If money is a particularly touchy subject in your family, factor that into how you’ll start the conversation.

1. Consider other options first

Exploring alternatives shows that you’re serious about borrowing and not just looking for an easy handout. It can also provide an idea of what you’re eligible for. If you find you’re eligible for more competitive rates and terms than you expected, you might want to go for that option instead.

Start your search for a loan with these common types of lenders:

  • Online lenders. These lenders often offer a quick turnaround and streamlined applications. Rates can be higher than what you’d find elsewhere and are often personalised based on your credit rating and current financial situation.
  • Banks. Already have a relationship with a bank? Some offer lower rates or no establishment fee for existing customers, plus they’ll already have an idea of your financial standing based on your account activity.
  • Credit unions. Owned by their members, these institutions tend to offer competitive rates and more relaxed eligibility. The process can take a little longer, and you’ll have to become a member to get a loan.

2. Make a case for yourself

Once you’ve exhausted non-family options, be clear that you want a loan and not a gift. Go into the conversation with an idea of how much you need to borrow, exactly how you plan to spend it and when you can reasonably pay it back. The more specific, the better.

The idea is to reassure your family that lending to you isn’t a risk, and it might help if you show how lending can also benefit them. Benefits don’t necessarily need to be in terms of profit — some people might even find this insulting. Think about what would appeal most to the person you’re talking to.

3. Prepare for a no

Just because you’re related to someone doesn’t mean they’re obligated to give you money. When a family member declines a loan, you can damage your relationship by pushing back or demanding a reason. In short, your relative isn’t required to share why they aren’t interested or even have a reason at all. If you get a no, accept it gracefully and reconsider a more traditional route.

4. Agree on clear terms

After a family member agrees to your loan’s terms, draw up a formal agreement to avoid any future confusion or surprises. You can write up the terms on your own or download a template from the Internet. You can find out more information on the Citizens Advice Bureau website. Alternatively, you can use a lawyer to draw up a legally binding contract.

Be sure to agree on the loan amount, how long you have to pay it back and if interest will be charged. Make sure to discuss what happens if you’re late or can’t make your payments.

Is a family loan taxable?

It might be. One benefit of signing a legally binding contract is that the IRD considers it a loan. It could prevent you from paying income tax on your loan. Otherwise, the IRD considers your loan a gift and will tax you on it.

If you’re thinking about borrowing more than $27,000 — say, you want to buy a house — it could be worth consulting a tax professional and a lawyer. When you get into loans or gifts of that amount, you could end up paying more than you expected come tax season.

Benefits and drawbacks of borrowing from family

Not sure if borrowing from your family is the right choice? Weigh up the pros and cons of getting a family loan first.

Benefits

  • No credit check. Even if your family wants to know your credit score before you apply, they aren’t able to pull a hard inquiry that can cause your score to drop a few points. However, they might want you to check your credit to see how you’ve been doing financially.
  • Low or no interest. Depending on your personal situation, family members are likely to agree to a lower interest rate than you’d find at your bank — if they charge interest at all.
  • Room to negotiate. Unlike with other types of loans, you have more of a say in the rate and terms you end up with than you might with a traditional lender. But be understanding. It’s still a loan, and you should treat negotiation professionally.

Drawbacks

  • Your relationships are at stake. While you might not end up filing for bankruptcy after failing to repay a family member, family loans come with more emotional risk than other types of financing.
  • You’re not dealing with experts. Lenders are well aware of the risks involved with lending you money. Your family may not be as informed and could regret getting themselves into the situation.

Decided to use a lender? Compare online loans today

Name Product Interest Rate (p.a.) Min. Loan Amount Max. Loan Amount Loan Term Monthly Service Fee Establishment Fee
Kiwibank Unsecured Personal Loan
9.95% - 18.95%
$2,000
$70,000
6 months to 7 years
$0
$240
Eligibility: Be 18+, an NZ citizen/permanent resident, and have a stable income. Ts&Cs apply.
Unsecured personal loans from $2,000
100% ONLINE
The Lending People Personal Loan
6.95% - 26.95%
$2,000
$75,000
1 to 7 years
$0 - $10 depending on lender
$50 to $695 depending on lender
Eligibility: Be 18+, an NZ citizen or permanent resident, in employment and earning at least $500 per week.
Secured and unsecured loans of up to $75,000 from a variety of reputable lenders.
Harmoney Unsecured Personal Loan
6.99% - 19.99%
$2,000
$70,000
3 or 5 years
$0
$150
Eligibility: Be a NZ resident/citizen and have a good credit score.
Apply for an unsecured personal loan up to $70,000 with no early repayment fees.
FROM 6.99%
The Co-operative Bank Unsecured Personal Loan
6.99% - 19.99%
$3,000
$50,000
6 months to 5 years
$0
$200
Eligibility: Be 18+, an NZ citizen/permanent resident, or have a valid work visa.
Floating-rate, unsecured personal loans from $3,000.
Lending Crowd Personal Loan
5.03% -19.30%
$2,000
$200,000
2, 3 or 5 years
$0
$200 - $500 depending on the amount borrowed
Eligibility: Be a NZ resident/citizen and have a good credit score.
Secured and unsecured personal loans from $2,000 to $200,000. 100% online with no paperwork or early repayment fees.
Nectar Unsecured Personal Loan
8.95% - 29.95%
$1,000
$25,000
6 months to 4 years
$0
$240
Eligibility: Must be 18+, an NZ citizen or permanent resident, have an income of $400 per week or more (after tax) and a stable credit history.
Unsecured loans from $1,000 with payouts made within one day of approval. Applications entirely online.
Save My Bacon Unsecured Flex Loan
49.95%
$1,000
$5,000
8 - 52 weeks
$4
$50
Eligibility: Be 18 or over, have an income of at least $400 per week and be a NZ citizen, permanent resident or have a valid work visa.
Medium-term unsecured loans from $1,000 to $5,000 with no hidden fees.
Gem Secured Personal Loan
6.99% -18.99%
$2,000
$70,000
6 months to 7 years
$0
$240
Eligibility: Be 18+, a permanent NZ resident and earning a stable income.
Secured personal loans with weekly, fortnightly or monthly repayment schedules and no fees for early repayment.
Max Loans Secured Personal Loan
6.99% - 29.95%
$1,000
$100,000
1 - 7 years
$0 to $10 depending on lender
$195 to $1,500 depending on lender
Eligibility: Be 18+, an NZ citizen/permanent resident, and have an income of least $400 per week.
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Compare up to 4 providers

What to consider when lending money to family

Whether it’s a good idea to lend to a family member depends on your unique situation. At best, it could be a way to help out someone you love and possibly make a little money on the side.

However, it could impact your own financial future. That’s because as a lender, you’re taking on risk. Before you give out a loan, look at your personal finances to make sure you can easily afford the amount your relative is asking for.

Will you still be able to afford an emergency expense? Are you risking your retirement funds? If yes, you might not want to give that loan. If you’re still not sure, talk with an attorney or tax adviser to learn more about what you’re getting into.

You may also want to consider asking for collateral, especially if you’re helping out with the purchase of a car or house. Requesting a lien on an asset may strain the conversation, but if the worst-case scenario happens, you’ll have backup.

Should I use a lawyer?

Unless you or your borrower understand tax law and the lending process, the likely answer is yes. A lawyer can help you draw up official documents that can be used come tax season to prove you’re lending to family rather than giving a gift, and they can also help determine if both you and your borrower have settled on good terms. A legal contract also comes in handy if the borrower fails to meet their obligations.

Alternatives to lending to your family

Giving a loan isn’t the only way to help out a family member. If you have strong credit, an alternative is cosigning with your relative through a joint application or guarantor loan.

By cosigning a loan, you help your family member qualify for a stronger rate while potentially helping them build their credit score. But you’re also on the hook for repayments if your relative can’t make them, and taking on extra debt can make it difficult to apply for loans of your own.

For a simpler option, you could simply gift your family member the money they need. You’ll avoid the tension that comes with collecting repayments, and you won’t have to deal with as many complicated tax questions.

Are there any protections? What happens if my family member stops their repayments?

Family loan contracts between private individuals are not covered by consumer credit law, so it’s important to have a legal contract in place.

If your family member defaults on their payments and doesn’t respond to your efforts to rectify the situation, you can make a claim at the Disputes Tribunal. Alternatively, your lawyer can write a letter, and if this doesn’t work, you can sue for breach of contract through the District Court.

Unlike with traditional lenders, you have the power to decide at what point you need to take further action. Without a legally binding contract, it can be very difficult to get your money back.

Bottom line

Borrowing from your family could be an alternative to a traditional or short-term loan if you don’t have a good credit rating or meet standard lending criteria. You may save on interest and fees, but it could hurt your existing relationships if you’re unable to repay what you borrow.

Before hitting up mum, dad or another relative, learn about more financing options and compare lenders in our guide to personal loans.

Family loan FAQs

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