If you need money but do not want to go to a bank, a private loan can help. In that case, borrowing money from family or friends is an obvious option. You would think that such a loan is a friend service and you can therefore generate a lower interest. But unfortunately that is slightly different.

Interest on the market

Interest on the market

According to the tax authorities, the interest charged on a private loan must be in line with the market. This means that the interest rate must be at least as high as is customary in the market. You can calculate this yourself by taking the average of the interest rates that banks and lenders charge for a similar loan.

Return interest on private loan

Return interest on private loan

When you as a parent lend money to one of your children, you can return the interest rate that your child pays in interest on the loan by donating it. You can donate more than USD 5000 tax-free to your child per year. For most loans, the interest that is paid does not exceed this amount. 

Private loan interest – Register

Private loan interest - Register

When you take out a private loan, it is very important to have it registered properly. Even if it concerns relatives or friends. The last thing you want is that money matters between both problems start to cause. When all agreements have been recorded in black and white, it can never be unclear and everyone knows where he or she stands.

The document where you record these agreements is called a private deed  and is best recorded by a notary. In this agreement you must at least include the following:

  • Name and address details of both parties
  • Start date, duration and end date of the loan
  • The highest of the total amount borrowed
  • The interest rate used

There are numerous ways to borrow money these days. Banks and credit unions are sometimes hesitant to lend to borrowers with less-than-perfect credit (although that’s not always the case). But several borrowing sources should be available.

Unfortunately, seeking out lenders is somewhat risky when you have bad credit. Moving away from the stodgy world of traditional lenders may be necessary, but it requires caution. It’s easy to get your identity stolen online, and lenders promising to work with borrowers who have bad credit are often expensive (which can make things worse than they already are).