Introduction
With the surge of layoffs and recession, many studies stated that most people turned to their families and friends for help. Loss of income would mean lenders are likely to reject loan applications. In times like that, borrowing money from those close to you can be a blessing. However, as with any loan, it can also be a double-edged sword. If you fail to follow through on the repayment of the loan could result in a damaged relationship.
If handled well, friendly loans can be a saving grace but it can quickly turn into an awkward and even hostile if either of the involved parties mismanage the situation. We have put together 5 tips that you should keep in mind while borrowing from family or friends.
- Look at the bigger picture
Asking a family member or friend for financial help can be awkward and occasionally, it puts the other person in a difficult spot. Before going ahead, consider all the alternative options to see if you can avoid it. If you have a good credit score, you might want to consider a personal loan or even a credit card, depending on your financial needs.
Additionally, before requesting anyone, you should ask yourself if the reason behind borrowing money justifies asking a loved one. For example, borrowing from a loved one to buy a new guitar amp or handbag may reflect poorly on you. However, in case of unexpected, urgent circumstances like a medical bill, home repair, or even if you are at risk of being evicted from your house, then it’s a legitimate reason to borrow from a loved one.
- Be realistic about how much money you need
If your circumstances require you to ask your loved ones for financial help, work out a few things first. Focus on how much you need rather than what you would like to borrow. If you have lost your job, then eliminate unnecessary expenses from your monthly budget and consider what you can expect from unemployment benefits. Just be realistic about what you need instead of requesting a random amount.
- How & who to ask
Once you have figured out how much money you need, think about the people in your life who might be in a position to offer financial help. We should never assume that others will always have the means to provide us with financial help. List out the people who have been at well-paying jobs for a while, they might have good enough savings they can lend you from. Someone new at a job may not have the means to offer you help even if they want to.
- Draw up a contract
Loan contracts may seem too much for friendly loans but they are crucial to avoid miscommunications down the road. Having things outlined in writing can also keep both parties honest and prevent finger-pointing later on. A contract should include the following terms:
- Amount borrowed
- Interest rate, if applicable
- Repayment term/deadline
- Recourse in case of non-payment
- Prioritize the payments
Just because you are borrowing money from a loved one instead of a bank shouldn’t mean you should take the repayment terms lightly. Treat it as you would a loan from a bank or credit union. In case you have hit an unexpected roadblock and aren’t able to repay on time, be upfront about it. They are much more likely to be lenient and empathize with you if there’s no friction between you both.
Conclusion
Borrowing money from loved ones can be an awkward situation for the parties involved. Not everyone will be in a position to help you out. Being smart about how you go about it is crucial. Ask the right people, people who are in well-to-do jobs will be able to help you out as opposed to people who themselves are struggling with their finances. We hope this helps you work out the finer details before you ask anyone to lend you money.
