Considerations When Taking Out A Personal Loan
What factors will affect your personal loan? Personal loan interest rates are determined
by the trust each party has in the other and the financial situation of each. The loan will be based on how much money the borrower is requesting and how much money the lender can afford to lend. The interest rates are very negotiable on personal loans. The interest rate may be very low when offered by friends and family. However, family members need to be careful about offering personal loan to shield money from creditors during bankruptcy or Medicaid when a spouse enters a nursing home. Offering a loan without interest can be construed as a gift or attempt to lessen one's estate and avoid estate taxes if the lender has a reasonable expectation of dying before the loan is repaid.If the personal loan balance is forgiven, the personal loan amount becomes taxable to the borrower. The lender can write this loss of his or her taxes if they have a loan agreement to back it up and do not make any more efforts to collect on the loan.
What should you do when taking out a personal loan? Get the details of the loan in writing. How much is the loan for? What is the interest rate? Will the loan be paid in installments every week, every month or every year? What is the duration of the loan? Both people need to sign the loan document, and they should do so in front of an impartial witness and a notary. This piece of paper is the lender's only protection in court if the other person says it was a gift, not a loan. You should also outline whether or not the personal loan is secured or unsecured. If you take out a personal loan for a truck and miss a payment, can the family member repossess the vehicle? Is the lender's name going to be on the title until the loan is paid off? Will the lender have a lien against the property until the loan is repaid? Or will you give them a piece of jewelry or an older vehicle as collateral? Can the lender sell that property to make up for a missed payment on the loan?
Relatives can set limits on the purpose for which the loan money is to be used. If the money is intended for of credit card balances or get out from under an upside down car note, this can be specified in the loan document. Caveats and provisions can be written into the loan stating that the person is in default if the money is used for a purpose other than debt consolidation, such as blown on a vacation or buy a new vehicle. In the loan documentation, clearly indicate who the loan is being given. If the loan is to a family member, is it to that person alone or are both spouses liable for the debt? Who is responsible for repaying the loan? Write it down to avoid confusion when collecting on the debt.
If you are a foreigner and receive a loan from a relative overseas, you may be required to report this loan to the tax authority. This loan becomes taxable income in many jurisdictions if you do not have to pay it back. Foreigner loans are also a source of risk due to the currency exchange rate. If you need a set amount each month, consider having the money converted to the currency of the country in which you are staying before it is sent so that you do not have to worry about currency devaluation leaving you short later.
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