A Guide to Borrowing Money from Friends and Family

The pandemic has put a dent in many people's bank accounts these past couple of years. According to a survey, 56% of Americans are unable to cover an unexpected $1,000 expense with their savings. Financial struggles have not left most people, especially when unexpected expenses happen. Whatever the reason, you may need to consider getting a loan to ease your financial burden. For people who are already knee-deep in debt or who have a bad credit history, it is almost impossible to get traditional loans.

You may want to consider borrowing some money from your friends or a family member. While you may think it is a bad idea, it has its benefits. Let's go over things you should consider before asking for a loan from friends or family.

4 Reasons Why You Should Borrow from Your Friends or Family:

1. No prolonged processes: While a lender may require some paperwork and take a long time to get an answer to you, a personal loan will be much faster than applying for a bank loan.
2. Slow access to funds: Most lenders take weeks or more to go through their process, which doesn’t help you when you really need the money.
3. Flexible repayment plan: A personal loan will likely be flexible and not have rigid payment terms. 
4. Low or no interest rates: One of the best benefits of borrowing money from friends or family is that they may not charge you any interest or offer you a really good deal you could not get from a bank.

4 Reasons Why You Should NOT Borrow from Your Friends or Family:

1. Becomes a source of embarrassment and discomfort: It might be uncomfortable for both parties if you owe money to friends or family. The embarrassment sometimes doesn't even go away after having repaid the debt. At times, paying higher interest rates feels more comfortable than having to deal with any possible embarrassment.
2. Might damage the relationship permanently: Your friends or family might not like it if you are caught spending money you were lent on things like dinners or trips. And your relationship could be permanently ruined if you don't pay back your debt.
3. Might be asked for instant repayment of the full amount: Since there are no predetermined terms like there would be with a bank or financial institution, you may be asked to return the entire amount at any time if they have an emergency.
4. No accountability since unofficial credit: If proper documentation has not been made, disputes may later arise because it will be impossible to verify what you agreed upon at the time of lending, the amount of money lent, and any fee or interest on it. And such disagreements are hard to resolve.

Things To Consider Before Borrowing From Family or Friends

• Set a Budget

To determine how much you can set aside for a loan or any expenses, create a budget and understand your current expenses. Make sure your friend or relative who is lending you the money is aware of the amount you need and what it is for. This will make them more comfortable in lending to you. 

• Know Your Limits

Refrain from more money than is absolutely necessary. Think about your financial situation to determine whether you'll have any trouble repaying the debt. You should treat a personal loan just like any standard financial obligation. Do not take advantage of the relationship, or it could turn sour.

• Put Everything in Writing

All the details of your agreement should be drafted in an agreement to avoid any future problems regarding the amount of any fees or interest and the repayment schedule. This agreement should be witnessed by two other people and be signed by both you and the person lending to you.

• Make Detailed Repayment Plans

Suppose you are unable to provide an exact loan amount; mention in your agreement a lump sum that you are willing to pay back over time. To uphold friendship and trust, make sure not to miss deadlines and keep your commitments.

• Have a Plan B for Repayment

Make sure you have a backup plan in case of any unanticipated events that would prevent you from paying back the money within the agreed time frame. This will help you get out of a tight spot. You may also offer collateral to the person to demonstrate your commitment to meeting your obligations and repaying the loan in full as soon as possible.

• Record All Payments

The agreement shouldn't be the end of the paperwork. To avoid confusion later, you should keep a record of every payment you make to the person providing the loan. Keeping a record will assist you with taxes and allow you to monitor the remaining balance on your loan, as well as avoid disagreements over payments made.

The Bottom Line

Whether dealing with professional lenders or acquaintances, money matters, and it must be handled in a disciplined manner to avoid any negative repercussions. To avoid running this risk, most people rather opt for other alternatives.

While these tips should help you handle financial business with your friends or family smoothly, it is recommended to consider how non-traditional payday loans might be a solution to your problems right now.

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