Taking A Loan From A Family Member? Read This
It was not till Raghu Sinha made himself abreast of everything about the world of real estate that he made a final decision to buy a property. By this time, he had turned 34. After doing all the calculations, he decided to take a loan from his brother to make the investment. Sinha seems to have made an intelligent decision.
Here is how.
- As there would be no time spent in doing the formalities, the home-buying process would take place much faster. For instance, Sinha will not have to present in front of his brother a heavy pile of documents. Or, he will not have to dazzle his brother with a great credit score report. A personal tête-à-tête between the two would be enough to seal the deal. (However, we strictly advise you to recruit a legal expert to make the process more legal than personal. We shall talk about the merits of doing this at a later stage.) It is worth mentioning here that it takes months before banks are able to process your request for a home loan. Depending on various terms and conditions, they may or may not decide to provide you with a home loan. In case you have defaulted on a loan repayment, financial institutions are going to take an adverse note of it. In case you have a poor credit score, banks will charge you a higher interest. In case you have switched jobs quite frequently in the past, you would be judged a drifter, and may find that banks are not warming up to you. From a bank's point of view, it is strictly business, and they would want to ensure that the loan does not turn bad.
- Under the Indian Income-Tax laws, a loan borrower can claim up to Rs 2 lakh in deduction against the interest, and Rs 1.50 lakh against the principal he pays for a home loan. Most of you may not have realised that you can avail of tax deductions even if the loan is taken from a family member, relative or friend. Now, under Section 80C of the I-T Act you can claim the deductions on the principal only if the loan is taken from a bank. This means Sinha will not be able to claim this deduction. However, no such condition applies in case the interest is paid under Section 24 of the law. This gives this category of borrowers a benefit of doubt. Sinha will be able to claim deductions of up to Rs 2 lakh in case he is paying an interest on the loan. It is precisely for this reason we advise you to get the paper work in place. It would be necessary to present all the papers at the time of claiming the tax. In case no interest is being paid to the family member or the friend, a borrower will not be able to claim any tax benefits.
- The bank will have all the right to start necessary proceeding in case you fail to pay off the loan back in a prescribed manner within a stipulated time frame. Almost any slips in this regard may land you in trouble. You risk losing the property if you fail to make regular payments in case of an unfortunate event. (You can never strike out the possibility of a job loss, for instance.) In a worst case scenario, the bank may repossess the property to recover the loan. After all, it has a business to run. However, your friends and relatives might be more patient. You can pay off the debt in a manner that suits you, and in a time frame that is comfortable for you. You can approach your friends and relatives, and share with them your problem in case you are going to take longer to pay off the loan. We do, however, suggest that utmost care must be taken to get the load off of you as early as possible. It would only be nicer if you pay off before time. This person who lent you the money has been good to you and is practically running a financial risk. Let him not regret his decision. Do note that any floundering on your part would spoil your relationship with the lender for life. It would also be helpful if the two of you made the process formal, and promise to honour certain terms and conditions.