One would not think that private loans to a family member or close friend could concern anyone except the parties involved. There are, however, several considerations that one need to be aware of before lending anything more than a small amount of money. The first consideration is what would happen if the money was not paid back. Unless a Promissory Note is written and notarized it is just one person’s word against the other and there is no legal recourse for recovering the money owed. Since a promissory note is a legally binding contract, it can be used in court to prove the debt.
The charging of interest on a loan made to a family member or close friend may seem uncharitable, it should be remembered that interest is designed to compensate the lender for the use of his money. There is also the fact that if the Internal Revenue Service becomes aware of the loan, then that will charge the lender an “imputed” fee on what interest should have been paid as taxable income even though you may not have charged your friend anything for the use of your money. The only relief from such charges would be if the amount loaned were to be less than whatever the annual gift-tax exclusion amount is in place for that year.
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