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5 Best Ways for Making Loans to Family and Friends

Money Girl explains what you show know about giving, lending, or borrowing when it involves family or friends, so you can protect both your finances and your long-term relationships.   

By
Laura Adams, MBA,
Episode #381

Way #4: Use a Marketplace Loan

If you want an alternative to direct lending or co-signing a debt, consider using a marketplace or peer-to-peer (P2P) platform. These lenders evaluate borrowers based on multiple factors, and match them with individual or institutional lenders who can earn above average returns.

I recently spoke to Gregg Shoenberg, Chairman of Peerform, about their lending approval process. He told me they look at a borrower’s credit, but believe that you’re much more than your FICO score. “We also evaluate other factors that create a more comprehensive profile of a prospective borrower,” said Schoenberg. He explained that a thin credit file may not disqualify a potential borrower if he or she has a steady job and no major credit issues.

So before turning to family or friends for money, consider applying to the following P2P lenders for a competitive interest rate and the ability to build credit:

Way #5: Use a Crowdfunding Platform

The final way to loan money or borrow it is to use a crowdfunding platform such as ZimpleMoney. Here’s how it works:

You submit the amount you’d like to borrow, including the interest rate and terms, and offer it to multiple investors, who may include your family and friends. If you're interested in loaning money to a loved-one without assuming all the risk, this is an innovative option.

ZimpleMoney also manages loans from beginning to end by administering agreements, tracking loan payments, collecting money, and maintaining tax records. Their free version tracks one loan, or you can subscribe to more comprehensive plans for as little as $18 per year.

See also: A Checklist to Measure Your Personal Finance Success

Final Tip: Consider the "How"

I mentioned that how the borrower plans to use money should play a role in how the transaction is handled. This is because when funds are used to buy a home or pay for education, some or all of the interest that the borrower pays may be tax deductible on his or her tax return.

If you borrow money to buy a home, the loan must be secured in order to take advantage of the mortgage interest deduction. To properly set up and manage a home loan with a relative, use a resource like nationalfamilymortgage.com.

If you’re eligible for an education loan tax benefit or the mortgage interest tax deduction and don’t claim it, you’re paying too much to the government.

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