It is common to find yourself in a tricky financial situation where you might need fast access to money. Taking out a loan or additional line of credit may act as a lifeline in the short term, but could also come with risks of its own such as high interest rates and fees.
Turning to a friend or relative could be a good option if you are looking for money in the short-term to get you out of a jam. However, there are important factors to consider before entering into this type of agreement with a loved one.
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Why might you need to borrow money from friends or relatives?
If you are presented with unexpected costs and do not have enough money to cover them yourself, you will need to look for alternatives, and fast. Many business owners seek financial assistance from family members to get their company started.
You might also encounter personal financial needs. This may be an unanticipated medical bill, car breakdown or home repair, that will need to be paid before your next paycheck. In this situation, borrowing money from a loved one could be an option.
Borrowing money from family or friends should only be done if absolutely necessary as it has the potential to compromise your relationship and is another way to increase your debts. Therefore, you should only borrow from a friend or relative if it is for something that desperately needs paying. Impulse purchases or lavish expenses should not be paid for by borrowing money from a loved one.
Is it common to borrow from friends or relatives?
According to Bankrate, around 60% of Americans have lent cash to a loved one before. It may be difficult to put your pride aside and admit to family or friends that you need money, but the people that love you most may also be the most understanding and most invested in your personal welfare. On top of that, borrowing from friends and family could work out to be more flexible and cheaper than seeking a loan from a bank or lending institution.
However, borrowing from friends and family is always a risk as it is difficult to bring the element of money into personal relationships. Bankrate also reported that 35% of people who have lent cash to a loved one felt that their relationship ended up suffering.
What are the benefits of borrowing from family and friends?
Borrowing from friends and family is one of the cheapest ways to borrow money. Loans and credit, specifically short-term loans designed for emergency costs, typically incur extreme interest rates. Payday loans, for example, come with an average interest rate of 400% APR, meaning that they become very difficult and expensive to repay. Friends and relatives, on the other hand, will not be as profit-driven. Typically, this type of borrowing will be interest-free or with only a small interest rate, decided between the borrower and the friend or family member lending the money.
This type of borrowing is also likely to be far less rigid than a loan in terms of the repayment plans. Loans usually come with a strict repayment schedule which, if unmet, can be detrimental to your credit history and future finances. The motivation for a loved one wanting to help you is not money-driven like it would be with a lender; this means that they will probably be less flexible with the borrowing, allowing you to repay it back as and when you are able to.
Unlike loans or credit, borrowing from loved ones will not appear on your credit record. This means that any late repayments or changes to the repayment schedule will not negatively impact your long-term creditworthiness.
It may also be easier to borrow money from family and friends than it would be to seek funds from a professional lender. Your friends and family know you as a person and can vouch for your character. Therefore, they will not look at your credit history to determine your reliability but instead they will look at the type of person you are and consider your circumstances with more compassion. Lenders will typically see things in black and white, only looking at your credit score; this means that they may be less likely to lend you the money.
What are the downsides to borrowing from friends and family?
Although it can seem like a cheap and flexible option, it is true that borrowing from friends or family members can put a strain on your personal relationship. Money can make things awkward and it is widely reported by people who have lent their friends or family money in the past that their relationship has suffered directly as a result.
Before entering this type of relationship, there must be honesty from both parties. The borrower needs to be fully transparent about their financial situation in order to come up with a repayment plan that is realistic. Both the borrower and the lender should be happy with the agreed repayment plan. Although missed or late payments will not incur financial risk in the same way that they would with official loans, they have the potential to destroy a personal relationship.
Additionally, you need to be confident that the person lending you money can afford to loan you the funds. If their financial situation is not completely stable, you could be putting both you and them at greater risk. If this is the case, you should explore alternative options in which there is a higher guarantee that you will receive the amount of money you need.
