Family able to lend Money to Purchase a Home: One of the safest and most lucrative investment possibilities is real estate. Particularly in major cities, the real estate industry is expanding quickly. Obtaining a home loan is one of the secured financing alternatives available for purchasing a property. which necessitates careful financial planning. However, the full cost of the property is not cover by bank and financial institution loans. About 20% of the property’s cost as well as other unanticipate costs must be paid for out of pocket by the buyer. When money is tight, most individuals look to their friends and relatives for assistance. As an alternate source of funding, many people think of borrowing money from their family members. However, many buyers struggle with the decision of whether to take out a home loan from a financing company or borrow funds from a family member. If you handle this arrangement professionally and not as a favor, borrowing from a family member may be a better choice. We go over the benefits and drawbacks of borrowing money from family members in this tutorial.
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The first advantage of borrowing money from friends or family is financial savings
In order to save a significant sum of money, the borrower may choose to pay no interest at all or just a minimal interest on the borrowed capital. For instance, someone takes out a house loan for Rs 30 lakh with a 20-year term and an interest rate of 8%. Ultimately, interest on this sum must be paid in the amount of Rs 30.35 lakh. The full sum or a portion of it may be save if the funds originate from personal connections.
#2. Flexible repayment terms and no EMI pressure
Family members’ loans might be taken out under customize terms that work for both of you. This may include flexible repayment arrangements after mutual agreement. However, when taking a loan from a bank or financial institution, an EMI must be paid to the lender continuously throughout the loan’s lifetime, irrespective of one’s financial status. There will be a penalty if there is a default. The individual might be grant a moratorium period in the event of a loss of income or other unfavorable circumstance, but it would come with a price. The bank may, in the worst situation, take back the property and sell it to recoup its losses. If the lender is a family member, these issues might not occur. They would be aware of your issues and help you get back on your feet.
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Reduced interest rates
The buyer must abide by the terms of any formal contract if the friend or family member lends the money and charges interest. The borrower will save a substantial sum of money if the interest rates are lower. The interest rates on loans from banks or other financial institutions may be higher.
#4. No documentation
A wide range of personal, professional, and property-relate documents must be submit at the time of house loan application in order to obtain a loan from a bank or other financial institution. When borrowing from a friend or relative, this does not apply.
#5. The credit score is not a cause for concern.
Banks and other financial organizations look up the applicant’s credit score when processing a home loan application. On a scale of 300 to 900, credit bureaus in India assign credit scores to borrowers depending on variables such the borrower’s credit history. If the borrower’s credit score is low (less than 750), they can be require to pay more interest. The bank may potentially deny the application if the rating is significantly lower. There is no need to consider this factor while borrowing from a family member.
#6. Time-saving
A formal agreement can be establish to move forward with the property purchase once a borrower has made up their mind and someone is willing to lend. When borrowing from friends or family, the process is considerably quicker and easier than when banks review a variety of paperwork to determine the applicant’s creditworthiness and approve the loan.
#7. Tax advantages
Under Section 24 of the Income Tax (IT) Act, a tax deduction of up to Rs 2 lakh may also be claim if the home loan is verify and interest is paid on it. Other deductions under Sections 80C, 80EE, and 80EEA are not permit, though.
Deduction for paying back interest on a house loan obtained from friends, family, or other relatives
Section 24 of the Income Tax (IT) Act states that the interest paid on a home loan is eligible for a maximum tax deduction of Rs 2. If the loan was taken out for home repair and rebuilding, there is also a tax deduction of up to Rs 30,000. However, the tax deduction for interest payments is only available upon the completion of the house’s construction or receipt of its possession. The Income Tax Act of 1961 makes no mention of the requirement that the loan be obtain from a specific bank in order to qualify for this deduction.
No deduction from family, friends, or relatives for the principal repayment of a home loan
Section 80C allows for a tax deduction of up to Rs 1.5 lakh when the principal on a loan taken out for the sole purpose of purchasing or building a new home is repaid. It should be note that the deduction only applies if the loan is obtain from a bank, LIC, the federal government, a state government, or other recognize organizations, and only if the loan is repaid. It is not possible to claim a deduction for repaying the principal on a loan obtained from friends, family, or any other lender.
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Drawbacks of borrowing money from friends or family
Insufficient clarity
Borrowing money from a friend or relative without a legal contract may present difficulties. Because these loans are informal, there may be misunderstandings about the interest rate, penalties, and other terms of repayment. Legal issues could result from this. Therefore, it is in both parties’ best interests to execute a legal agreement outlining the terms and circumstances of the loan.
Repayment delays may have an effect on relationships.
Although asking friends or family for financial support could seem like a simple solution, the borrower will typically have to pay back the loan. However, choosing to borrow the funds from a friend or relative in the first place or any late payments could make things unpleasant for both of them. It can occasionally even harm fulfilling relationships.
Implications for taxes
The government has implemented several regulations to control personal loans from friends and family. The first regulation is that a loan of more than Rs 20,000 cannot be accept in cash or by bearer check. A bank account should be use for all transactions, including bank drafts, payee checks, and electronic transfers. Even if the loan is paid back in installments, this rule still holds true. Second, bearer checks or cash must be use to cover all or part of the payback. There will be consequences for any infraction.
Advice to remember when accepting house loans from relatives or friends
If something goes wrong with the agreement, borrowing money from a friend or relative to purchase a home may have an impact on one’s personal life. Here are some guidelines to abide by:
Make sure the transaction is record.
It is preferable to have documentation even if the loan is being taken out from a close relative, like a parent. It’s also advise to pay some interest on the loan. In addition to providing tax advantages, this arrangement would guarantee that the borrower would not feel bad about taking out the loan. It will guarantee that the lender won’t subsequently regret their choice.
Pay back within the allotted period
It is in their best advantage to see this deal as entirely financial, even if the lender is their personal acquaintance. Additionally, one should give the lender a realistic time frame for loan repayment.
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Other options for financing the purchase of a home
Take into account a joint house loan.
Consider including a co-applicant when submitting an application for a house loan, since this will improve one’s eligibility for a larger loan amount. Furthermore, if each applicant makes a contribution to the loan repayment, further tax savings are available. Each co-applicant may deduct up to Rs 1.5 lakh from principal payments and Rs 2 lakh from interest payment in the event of a shared house loan.
Selling assets
Another popular option is to liquidate assets such as jewellery, stocks, or other investments to generate funds. The proceeds from the sale of personal assets can an ideal source of funds for the down payment during a property purchase.
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When taking out a loan from a friend or family member, it is important to keep the transaction document, backed by a formal agreement to prevent any disputes. You should also make sure that you have a clear line of communication with your lender and follow a clear repayment plan. If necessary, you can seek the assistance of a third party or a lawyer; they can help you comply with tax and other regulations.
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