Medical Bills • 3 minute read
By Mason Frenzel
Published by Ruby
Ruby's online tools and app helps you organize your medical bills and save money.
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Inter-family loans have a bit of a bad reputation. Although, here at Ruby, we are not ready to write off this form of lending just yet. When handled correctly, inter-family loans can be used as a tool to help alleviate some of the pressure of paying off a sizable debt.
For instance, you may be inundated with medical bills from a recent procedure, and even after making a plan to pay off the debt, your monthly payments are still more than you can afford. By taking out an inter-family loan, you can lighten your financial load in a way that is by-the-book and protects both parties from miscommunication. This article will provide you with the information you need to determine if this type of loan is right for you.
Inter-family loans: the lowdown
It is not uncommon for family members to loan each other money. Many people lend money with the hopes of helping out but are unaware that this act of kindness can have unfortunate consequences. They assume that their family member will repay the loan in a timely manner, but when both people are not on the same page and have differing expectations, it does not take long for tension to set in.
Unlike simply lending a family member money, taking out an inter-family loan provides a level of structure. With an inter-family loan, both parties come together to form a payment timeline as well as the amount of each payment. Outlining a plan upfront allows relatives and friends to help each other out with less risk of misunderstandings and tension down the line.
Inter-family loans are popular options for many because their interest rates are normally lower than those offered by the bank. While interest rates are already at a historic low, AltairAdvisors says that even a bank’s best clients would not be extended a rate equivalent to that of an inter-family loan.
The following is a list of pros and cons when utilizing inter-family loans:
Clear expectations between the lender and the borrower
- When entering into an inter-family loan, the first step is to form an agreement on details like the quantity of each payment as well as the loan’s term.
- This step is often neglected when family and friends loan each other money traditionally, which can result in confusion and disagreements later on.
Inter-family loans are open to anyone
- If you have a less-than-perfect credit score that deters banks from granting you a loan, an inter-family loan could help you purchase a home, car, or pay off medical bills.
Specialized payment plan
- When borrowing money from a family member or friend through an inter-family loan, you have more freedom to design a plan that caters to your needs. This could mean lower payments over a longer period of time, or even higher payments of a shorter period.
- You can also expect to pay a lower interest rate than you would for a more standard loan. As long as your interest rate is at or above the Applicable Federal Rate (found on the IRS website), you and your lender can determine the rate amongst yourselves. The AFR changes monthly, so it is a good idea to reference it before signing your loan. To check the current AFR, click here.
Since the loaned money is not a gift, the lender does not have to pay a gift tax.
- If the borrower is unable to pay back the loan, it becomes a gift in the eyes of the IRS, at which point the lender has to pay taxes on the loan.
- There is still a potential for tension. CTFA David Redding warns that, even if there are no issues between the lender and the borrower, other family members could still feel slighted by the arrangement. For example, if a parent loans one child money but not the others, the remaining siblings could grow to resent their brother or sister.
If you decide that an inter-family loan is the right option for you, there are a couple things to keep in mind. First, be diligent. It is crucial to document every piece of information related to your loan, as this prevents later disputes between the lender and the borrower, and prepares you for any inquiries from the IRS.
Keeping track of the interest rate, recurring payment amount, and term of the loan is especially important, according to Altair Advisors. It is usually best for both parties to come to a consensus on these factors before moving forward. Once the lender and the borrower agree to the terms, you are ready to document and legally register your loan.
Sometimes paying off debt can feel so overwhelming that it’s difficult to know where to start. In times like these, a little help can go a long way. If medical bills are weighing you down, Ruby is here to assist in forming a debt payment plan, and negotiating with healthcare providers to lower your costs. Ideally, borrowing money from loved ones will not be necessary, and if it is, we hope to considerably lessen the sum. Contact a Ruby representative today to get started!