As well as obtaining a loan from banks and lending companies, for whatever reason, you also have the option of asking friends and family for assistance. Unlike when borrowing on an official basis, there are no set guidelines on how or even IF interest would be charged, nor would there be any repayment schedule or loan terms.
It’s up to you as an individual to work out with whom you feel the most comfortable to borrow from. After working through that problem, you can address other aspects of the loan, such as interest rates.
Before we go into looking at the reasons why you shouldn’t take this option, perhaps we can look at things to consider if this is the only choice available.
Borrowing money from family and friends, however, is not the best option if you need money urgently. If there is one thing that will certainly ruin a relationship, it’s money, regardless of the amount. Entering a loan agreement with a family or friend should be considered carefully and it should be in an emergency situation only.
While you might be in dire circumstances, a loan by a family member to help you, might not sit all that comfortable with them. Even though it might be left unsaid, the lender might resent the fact that you are tying up their cash and possibly worry that they won’t be repaid. This can cause an unnecessary strain on the relationship. If you want to avoid this problem, you should be realistic and professional about the loan. Set up repayment schedules and keep communication lines open, should there be any late payments.
Money changes relationships. If you are in debt to a family member, that person might feel they have the right to exert more control over your life. It may even get to the point where the lender criticizes your lifestyle and spending habits. They may even ask to look at your bank statements. While sticking to the repayment schedule will ease some pressure, the whole situation may still put you on a guilt trip.
A loan taken through a bank or a lending firm is done through a contract with all the terms outlined in the agreement. Borrowing from a family member might mean that person can make changes to the loan amount or repayment terms at any time. To avoid this, a loan agreement should be set up, complete with a repayment schedule and even an interest rate.
Because the lender is a friend or a family member, it’s easy to take advantage of that situation and abuse the friendship by not treating the loan with any urgency. If a repayment schedule has not been arranged, repayments may lose their importance. Unlike borrowing from an established lender, there are really no repercussions for the borrower. No higher interest rates, no penalties and certainly no impact to the credit rating. With little or no motivation and no financial or legal threat, the loan can be put in the not-so-urgent basket.
There is always a certain amount of discomfort and embarrassment if the lender starts making demands about repayment of the loan. This is not an easy situation and can cause a problem with the relationship, regardless of whether they are a friend or relative. It’s not only talk about the loan that stops, all other communication usually stops as well.
The situation can always be resolved if there is communication done the right way. There is a right way and wrong way to sort out personal loan problems, and the main idea is that both parties feel okay after a meaningful discussion.
Even though other family members or friends may not know that you borrowed money, the two people involved in the deal are aware. This can make family gatherings a bit awkward. Even if it’s just friends, that slightly awkward feeling persists. The situation can get worse if the lender has revealed the loan to others, or discussed it with others. As the borrower, it can be embarrassing to realize that other people know your financial problems.
A family member or friend may take advantage of the fact that they lent you money. They can ask you to do things in return that really have nothing to do with the loan arrangement. The borrower will feel an obligation to do what is asked of him.
By borrowing money you are looking for an immediate financial solution to your problem. Is there another way? Making a daily, weekly and monthly budget or looking for alternate forms of income should be looked at first.
Money invested earns interest or compound growth. Money lent to you, earns little or nothing in the way of interest. A friendly loan is principle only and has no advantages for the lender. Remember that.
If you borrow from a friend or family and don’t repay the loan, the lender loses their money and it’s the end of the friendship. Feelings such as anger, guilt, and remorse will be present and either there is tension in the relationship or no relationship at all.
Borrowing from friends is neither recommended, private, nor a good solution to a financial problem. It’s no doubt cheaper in the long run, but the personal issues can outweigh the advantages. So, think twice before borrowing from relatives and friends, and apply for a quick loan fast and easy.
John has been a freelance writer for the past 3 years. He worked for 4 years as a Mortgage Consultant and a Financial Advisor. He also worked for 2 years as a Loan Manager for a medium sized company that handled bad credit loans, car loans and personal loans. We are excited to have John in our team!
John writes about Finance, Philosophy, Money Saving Tips and much more. He is a proud Member of Financial Advisers Australia (AFA) and has Cert IV in Financial Services.