A financial middleman for family loans
Loaning money to family and friends
TEXT OF INTERVIEW
Tess Vigeland: Well, it is November, so you know what that means: Get ready for every relative you've ever known coming over and grubbing on turkey.
But for some, these types of family get-togethers can be uncomfortable because they owe a relative money. A new service claims to help manage those kinds of loans.
It's called Virgin Money and it's owned by Sir Richard Branson of Virgin Airlines and Virgin Records fame.
I asked Kathy Kristof of the Los Angeles Times for details.
Kathy Kristof: Normally these loans are very informal and often, because they're so informal, they go sour. They don't really want to talk to you at the Thanksgiving dinner and so you end up having a problem with that loan. So this creates a formal way to do these loans. Of course, the downside is they charge you for that, right?
Vigeland: Right. So how does this service actually work? Does Virgin Money make any recommendations, for example, on what kind of interest rate you might want to have, at least to avoid problems with the IRS?
Kristof: Well, they understand both the tax laws from the standpoint of what you can do without getting into trouble with, kind of, gift taxes, because essentially on a personal loan, if you do not charge a market rate of interest as determined by the IRS, the IRS will consider it a gift. And so they actually know if you would be running afoul of that and they'll tell you and if you buy that particular service, they'll actually do the proper reporting so that you can be on the right side of the IRS all the time.
Vigeland: Would you want to use this if you're lending a hundred bucks to a friend or are we talking maybe a little bigger than that?
Kristof: To me, this makes sense if you're doing a fairly large loan and it's the type of loan that you would want some kind of tax reporting for. You know, for instance, if you're doing a mortgage loan, that's a level of sophistication that I think, you know, is probably worth paying for and also because you're talking about a lot of money in that case.
Vigeland: In general, I would think, it's easier to loan money to friends and family if you treat it like a business transaction.
Kristof: In the right circumstances, this can be a win for both the borrower and the lender, because, essentially, you can give the borrower a better rate of interest than they could get someplace else and as the lender, you could be getting a better return than somewhere else as well. But, you know, it's like anything else. Be thoughtful about who you're handling these transactions with because otherwise you lose the money and the friend.
Vigeland: Kathy Kristof is a personal finance columnist for the Los Angeles Times. Thanks so much.
Kristof: Thanks Tess.