Should you borrow money from family and friends?
When faced with financial challenges or unexpected expenses, borrowing money from family and friends can seem like an appealing option.
A US Census Bureau study found that over 10% of Americans had to borrow from friends and family in 2021 and 1.6 million Britons give money to family members each year to pay for things (Source: SmallBusiness). After all, loved ones may be more understanding and flexible with repayment terms compared to traditional lenders.
However, mixing money with personal relationships can also bring some difficulty and potential pitfalls. In this article, we’ll explore the pros and cons of borrowing money from family and friends to help you make the best decision for your financial situation.
The pros of borrowing money from friends and family
- Flexibility with terms: Borrowing from family and friends often comes with more flexible repayment terms compared to traditional loans. Loved ones may be willing to offer lower interest rates, extend repayment deadlines or even forgive the debt altogether in certain circumstances.
- No rigorous checks: Unlike banks or financial institutions, family and friends typically don’t conduct credit checks or require your documents when lending money. This can be advantageous if you have a bad credit history or limited access to traditional financing options. You may have better success with your family who can offer a loan with no credit checks, rather than the strict processes carried out by traditional banks and lenders.
- Emotional support: Borrowing from family and friends can provide emotional support during challenging times. Loved ones may offer encouragement, guidance and understanding as you navigate your financial difficulties, alleviating some of the stress associated with borrowing money.
- Preservation of privacy: Borrowing from family and friends allows you to maintain privacy and discretion regarding your financial situation. Unlike traditional loans, which may require sharing personal and financial information with lenders, borrowing from loved ones can be kept confidential within your circle of trust.
The cons of borrowing from friends and family
- Strained relationships: Mixing money with personal relationships can strain or damage friendships and family dynamics. Disagreements over repayment terms, delays in repayment or unforeseen circumstances can lead to resentment, tension and conflict. You may not want to jeopardize your close relationships.
- Mismatched expectations: Differences in expectations regarding repayment terms, interest rates and timelines can create misunderstandings and conflicts between borrowers and family lenders. What one person views as a generous gesture may be perceived differently by the other, leading to disagreement.
- Dependency behavior: Relying on family and friends for financial assistance can foster dependency and may also enable irresponsible financial behavior. Borrowers may become accustomed to seeking bailouts from loved ones rather than taking proactive steps to manage their finances responsibly.
- Lack of legal protections: Unlike formal loan agreements, borrowing from family and friends often lacks legal protections and formal documentation. Without a clear written agreement outlining the terms of the loan, both borrowers and lenders may be vulnerable to misunderstandings, disputes, and legal complications.
Tips for borrowing from family and friends
Communicate openly
Have honest and transparent conversations with your loved ones about your financial situation, borrowing needs, and repayment expectations. Establish clear communication channels to address any concerns or issues that may arise throughout the borrowing process. You are better off getting your family and friends involved, rather than doing something before their back such as taking money or pawning items from their homes (which is not uncommon for people in debt).
Set clear terms
Clearly outline the terms of the loan, including the loan amount, interest rate (if applicable), repayment schedule and consequences for late or missed payments. Money Helper recommends putting the agreement in writing to ensure clarity and avoid misunderstandings.
Treat it like a business transaction
Approach borrowing from family and friends with the same level of professionalism and responsibility as you would with a traditional lender. Honor your commitments, make timely payments and demonstrate gratitude for their support.
Explore alternative options
Before borrowing from family and friends, explore alternative financing options such as personal loans, lines of credit or peer-to-peer lending platforms. Consider the total cost of borrowing, repayment terms and impact on your close relationships when evaluating different options.
Conclusion
Borrowing money from family and friends can be a double-edged sword, offering both advantages and challenges. While it may provide flexibility, it also carries the risk of straining relationships and lacking legal protections.
Before deciding to borrow from loved ones, carefully consider the potential consequences and explore alternative financing options to make a decision that is best for both parties.
