True or false: borrowing money from family and friends is an awful idea.
For many people, their immediate answer would be a resounding “TRUE!”
Aside from having to swallow your pride to ask for financial help, surely accepting these types of loans would put unwanted strain on the relationship? And don’t you risk everything from guilt to resentment building up if something goes awry?
Well…not necessarily.
Although these sorts of assumptions aren’t unreasonable, borrowing money from loved ones can actually be a mutually beneficial arrangement if done correctly.
If you’d like to experience the benefits of these friend and family loans, read this article for four expert tips that will help you get started.
1. Treat It Seriously
Anybody who’s ever received a bank loan knows how much bureaucracy and red tape you have to go through.
There are meetings to attend and applications to make. You have to outline your entire financial situation! Sometimes you even have to offer something up as collateral in case you miss too many repayments.
In other words, it feels like a big deal from the outset.
It’s crucial to treat loans from loved ones in a similar way!
In the absence of any official process, it’s easy to become cavalier about it. Yet that’s a recipe for trouble- especially as far as repayments are concerned.
Make your case to a friend or family member as you would any other lender. Tell them why you need the cash and how you’ll spend it. Outline how long it’ll take to repay and how much interest you’ll pay them each month.
This sort of mini-presentation should a) show them how serious you are about the loan and b) make you treat it appropriately.
2. Be Realistic With Figures and Terms
If asking your best friend, parent, or colleague for money feels bad enough, then imagine going back to ask for more when you realize the first loan isn’t enough.
It’ll be ten times worse.
That’s why we recommend being specific and realistic with the amount of money for which you’re asking.
Trust us, the first question they’ll ask upon your request for financial support is “how much do you need?” Run the numbers so you can answer with a set figure (as opposed to the classic, “how much can I have”!).
On the subject of being realistic, make sure you agree to repayment terms you’re confident you can stick to. For best results, break down how much you’ll pay, when you’ll start paying them, and when the due date is each month.
3. Have a Plan
Nobody wants to miss a repayment when they’ve borrowed money from a loved one. But it’s unavoidable sometimes! Thankfully, preparing for these scenarios in advance can stop the fallout from being as bad.
Talk to whoever’s giving you the money and put a backup plan in place for what happens in these situations.
For example, you could offer to pay a late fee that increases as time elapses. If you can’t pay that, then perhaps you could roll everything over and pay double next month? Or why not use something you own of value (like a watch or necklace) as a form of collateral?
4. Put Everything in Writing
It might seem excessive, but one of the best ways to ensure a smooth experience for everyone involved is to create and sign a simple legally-binding contract for the loan.
Sometimes known as a promissory note, it achieves two things:
First, having everything you’ve agreed upon in writing will keep you honest and help avoid misunderstandings. Second, it’ll give your lender peace of mind that they’ll get their money back as agreed upon!
From there, it’s a matter of committing to the process and abiding by the terms of your contract. Ultimately, the danger of impacting your relationship with the lender should be enough to keep you on track.
If something does go wrong, though, the knowledge they can take matters up in the small claims court if you default will be!
Consider Borrowing Money from Family and Friends
There’s no denying that borrowing money from loved ones comes with risks.
Heck, the simple fact you’re taking their money adds a new dynamic to the relationship! Then there’s the potential for missed payments to think about, alongside the stress and hurt feelings they can create.
It’s these kinds of possible outcomes that make many people assume these loans are a bad idea. As we’ve seen, though, they definitely don’t have to be!
Do things right and both parties walk away better off; the relationship intact.
We hope the tips in this post will help you achieve these happy results if you ever do borrow money from family and/or friends. Looking for other means of finance? You can apply for a loan on through our website today!
