“Hey Cuz, let me hold somethin’ . . .
If you’ve lived long enough, you have probably been asked this question which has left you feeling a bit uncomfortable. How did you or do you respond to this question when a good friend or family member asks to borrow some money? Follow me for a minute. With the state of your 401 (k), economy, tariffs, increased cost of living, job loss and more Americans participating in buy now pay later plans; can this reality be too far away? I know that you are probably going to say, “don’t lend money you cannot afford to lose.” But let me suggest that’s not the only factor to consider . Let’s take a look.
Loan Terms
If you are considering lending to friends or family, consider the terms of the loan. Many people lend to family and friends without interest and that’s a big mistake! While I understand you want to help them out or be of assistance; but can I tell you that lending at low or no interest to family members can get you in trouble with the Internal Revenue Service (IRS). According to the IRS rules, if you lend more than $10,000, you are required to charge the Applicable Federal Rate (AFR). Why does this matter? It matters because failure to do this may cause the amount you loaned to the person to be counted against them as income. This means they will have to pay taxes on that money received as though it were income.
Another basic factor is to ensure that the loan is memorialized in writing. Yes, I know you can shake hands and or make verbal arrangements but that will not allow you certain benefits if a person defaults. If your family member or friend defaults on the loan and it is in writing, your agreement can serve as documentation in support of a bad-debt tax write-off for next tax tax season. Once you have decided to put the agreement in writing, it may also be a good idea to have the document notarized.
Finally, there are some other terms which may not seem so friendly when it comes to lending to family or close friends, but are worthy of consideration. You may want to consider as a condition to lending the money, receiving a copy of the person’s credit report. Sure, you’re not a bank or credit union, but should you not know the risk associated with you lending this money. Now to be clear, this condition should not be applied universally, but it really depends on your comfort level, relationship with the person and the amount of money being requested. From a collateral point of view, you may consider receiving a copy of the person’s credit card and perhaps in the agreement an allowance for you to charge items on the credit card in the event repayment cannot be collected in cash.
Take Away
Lending money to friends or family can become a real sensitive subject and lead to all types of relationship issues. If the person wants to borrow money to throw a graduation party, should you be funding such an event? What events or conditions will precipitate or justify you lending money? You probably need to determine your own lending rules before you find yourself having to answer this question sooner rather than later.
WHAT’S UP! Today’s What’s Up is about no more paper checks. President Trump signed an Executive order requiring all federal government agencies to phase out the use of writing paper checks for all government disbursements. The goal is for secured electronic payments to be in effect from after September 30, 2025. This means that social security or tax refund payment will now be sent electronically or on debit cards. As for the unbanked, they will still receive paper checks. And that’s what’s up!
Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2025. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any for
