Business is booming at the Bank of Mom and Dad.
As banks have tightened lending standards, growing numbers of families are stepping into the breach. But while intrafamily loans can yield significant financial rewards for lenders and borrowers, families must carefully assess the risks.
While many families handle the process in informal oral agreements, advisers urge clients to document such loans in written contracts, just as a bank would. This can also make it easier for families to comply with tax rules that require lenders to pay income tax on the interest they receive and allow borrowers with mortgages to deduct the interest payments they pay.
Some families choose to go through websites like Prosper and Lending Club, which match lenders and borrowers online–though they also set minimum interest rates.