While you get a contract for a classic loan at the bank or at an online lender, a monetary loan among friends or in the family usually goes without a written document. But this is precisely the problem that you might overlook with a relative loan. Even if you get the loan interest-free and repay only the amount received, you should create a written contract signed by both parties.
This is important
At the latest when your account is credited, you might quickly suspect that your interest-free loan is additional income and must be taxed. In order to avoid this problem and to exclude trouble with the tax office or a social authority, you should declare an interest-free loan among friends and in the family as such.
FAQ about the relative loan
What is a relative loan?
A relative loan is characterized by the fact that it is made by a relative of the borrower. It's the most common form of personal loan. Strictly speaking, every loan within the family is a relative loan. With considerable sums tax aspects take effect. Otherwise, a relative loan does not pursue commercial aspects and are often granted interest-free. Often they are used to bridge short-term financial bottlenecks. But also long-term and larger projects can be financed over it.
Interest-free or low-interest: avoid tax traps and hassles with friends
If you borrow 100 or 500 euros in cash, you do not necessarily have to draw up a contract within the family. But even among friends, you should not do without a written agreement. Be sure to keep a record of when you will receive the amount and by what date you have to pay it back.
Attention!
A loan among friends should in any case be put in writing. Otherwise, serious problems could arise, at the latest if you overlook the orally agreed deadline and lay the foundation for a broken friendship. As we all know, friendship ends when it comes to money. This is not a metaphor, but the ruthless reality.
Likewise, you should protect yourself from falling into the tax trap or being sanctioned by the Arge because the borrowed money is considered income. If you have borrowed money from friends at no or low interest, don't be afraid to insist on private loan agreements and cover yourself in all directions. This also applies if an interest-free loan is granted, for example, until the next salary is received and repaid after two weeks or a month.
Private credit agreements – advisable or unnecessary?
Tip
In any case, a credit agreement is advisable. Between parents and children, or between spouses, one may refrain from. But when it comes to more distant relatives or friends, a contract eliminates later disputes. For example, you can note that the personal loan is an interest-free loan.
If your friend later claims interest, you can refer to the contract and prove that you were given an interest-free loan. The higher the amount borrowed, the more important the contract becomes. For example, borrowing money interest-free to buy a car or modernize a house, the sum alone conditions the focus on private loan agreements.
In addition to adhering to a formal requirement, which must include all the important points as in a business loan agreement, you should list separate agreements and sign each page of the agreement. You don't need a witness if you draw up a contract and grant the personal loan on the basis of a sound agreement.
What is a private loan and when is an interest-free loan considered as income?
Generally, a personal loan refers to any loan that is made without a bank. If you borrow money from a family member, a friend or a work colleague, it is a loan from a private individual.
As a rule, this credit is given as an interest-free loan, although even with personal loans you are entitled to charge a customary interest rate and earn return on the loan. In the case of loans to relatives or even if an interest-free loan is made among close friends, the focus is rarely on the return on investment.
This is what distinguishes a personal loan:
the lenders come from the own family or circle of acquaintances
If the loan is interest-free, this note must be included in the contract. If an interest-free loan appears on the account statement, it should be compulsorily described as an interest-free loan in the purpose of use for the security of the borrower. In this way, you can exclude the possibility that the relative's loan will eventually be considered income and taxed.
You are repaying an interest-free loan and should also note that your remittances are identifiable as repayments for the loan by their use notes. The more comprehensively you secure yourself, the better you will circumnavigate possible problems and the more plausible the transfer routes and the amount that appears in your account as an interest-free loan and not as money given as a gift will be.
An interest-free loan must be clearly defined as a personal loan
No later than the annual tax return, an interest-free loan can't be kept a secret. While as a recipient of social benefits you are already obliged to declare the money at the time it is received, as an employee or self-employed person you are faced with the task at the end of the year of presenting the money received in a plausible manner and thus avoiding unnecessary taxation.
While smaller amounts that aren't recognizable as personal loans are taxed through your income, larger amounts may incur a gift tax that shouldn't be underestimated. Your interest-free loan is suddenly no longer "interest-free" but far more expensive than if you had borrowed money from the bank.
Attention!
Pay explicit attention to the fact that a friend or relative loan is disbursed to you with the appropriate note. In order to avoid later problems, you speak concretely which intended purpose and which reference should be evident in the transfer.
In addition, private loan agreements serve to provide you with proof and define the receipt of the money as a loan. An interest-free loan is a good and affordable alternative to a bank loan, as long as you treat this loan option with the same care as a loan you apply for from a bank.
Here's how to avoid gift tax on an interest-free loan
Any amount not earned as income, especially larger sums, will be considered a gift, unless you have some other explanation for the money in your account. The tax office assumes a gift as soon as a loan is granted without interest and will run for more than one year. It is equally important that the allowances per year are not exceeded.
All these problems and tax restrictions are avoidable by making it clear that this money is an interest-free loan and not a gift. Loans that are noted as such and marked accordingly do not have a negative effect on recipients of social benefits, employees or the self-employed.