Borrowing from relatives is cheap, quick and easy to get. That is exactly why it goes wrong. Nobody checks your credit, nobody asks for pay stubs, and nobody writes down what happens if the money does not come back.
NerdWallet, in a guide updated on September 30, 2026, puts the trade-off bluntly. A loan from family can cover a down payment, start a business or pay off high-interest debt. But if the borrower defaults, the relationship with the lender is at risk, and so are the borrower’s finances.
Why people do it
There is little standing in the way. A family loan has no formal application, and no credit check or income verification. Relatives are unlikely to add late fees or an origination fee, and they may charge far less interest than a bank, a credit union or an online lender. If the borrower loses a job or falls ill, a relative may agree to pause payments. For someone who would otherwise turn to payday lenders, that matters.
The structure is up to the two people involved. The loan can carry interest or none, be paid in installments or one lump sum, and be unsecured or backed by collateral.
The tax rules people forget
Under $10,000, there may be no tax consequence, provided the borrower does not use the funds to earn money. Once a loan reaches $10,000, the lender may be expected by the IRS to charge interest and declare it as income. The rate should be at least the applicable federal rate, which the IRS sets monthly. If the lender charges nothing, or less than that rate, the IRS may treat the missing interest as a gift. A gift above $19,000 in 2026 could mean a gift tax return.
Schwab makes a sharper point. In its view the IRS requires three things for a loan between relatives: a written agreement both sign, a set schedule for repaying, and an interest floor. Without them the loan may be seen as a gift in disguise. Forgiving a loan later turns the unpaid amount into a gift for tax purposes. A lender hoping to deduct a bad loan has to prove he or she tried to get the money back. Schwab also warns that private mortgages are more complicated, so a tax advisor or financial planner is worth consulting.
Put it in writing
NerdWallet’s advice is to formalize the loan, even if a notarized and signed contract feels impersonal. Having the terms on paper heads off misunderstandings. The agreement should state the amount and what it is for, the payment amounts and schedule, the interest rate if there is one, whether early repayment is allowed without penalty, and the consequences if the borrower stops paying, briefly or permanently.
Borrowers should explain how much they need, why, and how they plan to repay. They should expect questions and give the relative time to think. Lenders should ask themselves whether they can afford to lose the money.
One drawback is built in. Payments on a family loan never reach the major credit bureaus, so repaying it does not build the borrower’s credit. A bank or online personal loan, by comparison, typically runs two to seven years at rates from 6% to 36%.
Sources
- Family Loans: How to Borrow From and Lend to Family (NerdWallet, updated Sep 30, 2026)
- NerdWallet, same article, agreement and alternatives
- Family Loans: Should You Lend It or Give It Away? (Charles Schwab, July 12, 2024)
