Borrowing money from family and friends is the most common form of borrowing across the world. Whether it is just $10 or $50 here or there, to borrow money for a new car, home, wedding or to start a business.
Whilst it is often based on trust and wanting to help out those around you, it is important to know that borrowing money from loved ones can get a bit sticky and lead to conflict if not handled in the right way. With this in mind, Dollar Hand provides a useful guide on how to borrow money from friends and family in the most effective way possible.
What Should I Consider Before Borrowing Money From Family Or Friends?
Whilst borrowing from family or friends can be extremely convenient, it can also lead to tension if it is not dealt with correctly. Key considerations and important steps to take to prevent any conflict include to:
1. Be transparent about the reasons for borrowing money
Revealing the reason why you need to borrow money is a good idea since it might make your loved one more understanding and patient with you throughout the borrowing process. Explaining that you have an emergency expense to pay for, have lost your job or are facing debt will mean that your family member or friend may be more supportive and want to help you get back on your feet. As a result, they may not charge you interest or they may make the repayment terms more flexible which will take the pressure off.
2. Create a formalized agreement or contract
Whilst it’s not that common to have a formal agreement with family or friends for borrowing money, it can help make sure that the process goes smoothly. It may not be necessary for small amounts but it is worth considering if you want to borrow $800, $1000, $2000 or more. The contract does not need to be extremely detailed but agreeing to key features such as repayment terms and the outcomes of failing to repay will help to set important boundaries.
3. Set clear repayment terms
If you are borrowing several hundred or thousands of dollars from a family member or friend, then you should definitely consider creating some repayment terms. Give a certain timeframe you intend to pay the loan back in to reassure your loved one.
It is also important to discuss whether your relative or friend may charge you interest. Whilst it is most likely that this will not be the case, distant family members or perhaps a parent teaching their child a lesson may add on additional fees.
4. Manage the expectations of the repayments
If you are in a pressing situation and need cash quickly to pay for an urgent expense then you may need to quickly ask friends or family for some money. In this case you may not have had time to formalize an agreement or to create a clear repayment plan for them. If so, it is essential to communicate as much as possible with your lender to manage their expectations.
If you need a few weeks or months to stabilize your finances, most family or friends will be very understanding. However, going many months without any repayment or without providing any kind of update would most likely cause resentment and tension from your loved one.
What Are The Pros And Cons Of Borrowing Money From Family Or Friends?
Borrowing from relatives or friends can be extremely convenient. It will often come with very flexible repayment terms and potentially no interest or additional fees. If you cannot get a loan for bad credit, then asking a loved one for money might be a good option for you.
However, borrowing from loved ones can be problematic if it does not go to plan. Failing to pay them back within a reasonable timeframe can lead to awkwardness, tension or resentment and could damage your relationship.
What Are The Alternatives To Borrowing Money From Family Or Friends?
If you are worried about compromising relations, there are other options you can consider to get fast cash. Examples include payday loans, title loans, bad credit loans or loans from credit unions to name a few. You could also consider selling items you no longer need through a yard sale or platforms such as eBay and Facebook marketplace.
Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.