We've all been there. Sometimes you get into a tough spot financially and just need a little cash to get you through to payday. Or maybe you're the Chief Financial Officer of the "International Bank of Mom and Dad" and you've been in a position where you can lend your kids hundreds, or maybe even thousands of dollars.

If you're like me, you've let kids borrow money interest-free with no real timetable in mind when it comes to repayment.

What Are the Rules When Making Personal Loans?

What do you do if you want to make things a little more official?

Are there actions you can take if a family member or friend doesn't repay the money they've borrowed?

Is it legal to charge someone interest when you're making a personal loan?

Two Simple Rules

Financial experts always seem to be in lock-step when it comes to lending money. More often than not, most offer two pieces of advice when it comes to lending money to friends and family:

  1. Get it in writing.
  2. Don't loan more money than you're prepared to lose.

Can I Legally Charge Interest When Lending Money to a Friend of Family Member?

The short answer is yes.

Neel Shah is a certified financial planner and tells US News and World Report that you are well within your rights to charge interest when making a personal loan. The money would be earning some money if it were in a savings or investment account so you shouldn't feel like you have to lose money by lending it to a friend.

However, Shah never makes recommendations on the interest rate that should be charged. He notes that you probably shouldn't charge more than a bank would, based on current interest rates.

Rocket Lawyer.com notes that there can be tax ramifications for the lender. It may be necessary to consult with an expert to make sure the loan and repayment schedule are structured properly.

They also offer a sample contract that can be drawn up between both parties in order to make sure the terms are clear. Again, getting it in writing helps avoid confusion down the road.

What If the Money is Not Repaid?

It may sound harsh, but if a friend or family defaults on a personal loan, you may have to take legal action. For small loans, action can be taken in small claims court. Getting the terms in writing is essential, because lenders who make verbal or handshake deals may not have any recourse.

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