Borrowing money from a family member or friend might seem like the perfect solution if you’re strapped for cash. You have someone willing to lend to you, and they trust you to pay the money back. The terms are certainly likely to be a lot more favourable than borrowing from your bank, a payday loan or, god forbid, a loan shark. And yet, borrowing from friends and family often isn’t quite that simple. In fact, it can ruin relationships if you’re not careful. However, it doesn’t have to. If you have a good relationship and you work everything out in a smart way, it can all turn out ok for both of you.
Look at other options
For some people, borrowing from a friend or family member could be the first choice. If you trust each other completely, you could be happy to lend each other money when you need it. However, others aren’t so quick to approach someone they love about borrowing money. Before you ask your parents or your best friend if they can lend you some money, you might want to explore your other options. These could include taking out a loan, using a credit card or even selling something that you own. It’s worth exploring your other options and which ones might be most affordable.
Consider your relationship
Before borrowing money from a friend or relative, think about your relationship with each other and how having a debt between you could change that. If everything goes wrong and you can’t pay back the money for a while, would it change your relationship forever? You should also think about your respect for them and the reality of you really paying the money back. Are you going to feel like the debt is hanging over your head (and your relationship) until you pay it back? Do you respect them enough to make sure you repay it as quickly as possible?
How much can you afford to borrow?
You also need to think about how much you can afford to borrow – or rather, how much you can afford to repay. Working out a budget is important no matter how you decide to borrow the money you need. You need to figure out how much you can repay each month so that you can discuss how much your friend or relative might be willing to lend you and over what period. It’s also a good idea to be able to show them that you’re confident about paying them back when you ask to borrow some money.
How much can your friend or family member afford to lend?
Another essential thing to consider is what the other person can afford to lend you. Of course, you can’t see into their finances, but you need to be careful about taking advantage of their generosity. Some people are perfectly willing to help out someone they love at the detriment to their own happiness. Make sure you have an open discussion about whether they can really afford to help you out. If they weren’t lending you the money, what else would it have been used for? If it’s long-term savings that you can quickly replace, that’s different to money that they had earmarked for their holiday next month or to fix their boiler.
Discuss the terms of your agreement
You should talk about how formal your agreement is going to be. Are there going to be any specific terms that you need to follow? Some things you might want to discuss include whether you’re going to pay any interest, how much you’ll be expected to pay back each month, and how you’ll repay the money. Some agreements can be quite casual, while others might be a lot more formal loan agreement and even put into a contract. It could range anywhere from “pay me back whenever” to a detailed payment plan with interest.
Write down your agreement
Once you’ve agreed to the terms of your loan, it’s a good idea to write it down, and for you both to have a copy. This means you will each have a reminder of what you agree to, so neither one of you can argue something else. Some people might want to draw up legal paperwork, depending on how much you’re borrowing and how your lender feels about giving you the money without it.
The most important thing to do when a friend or relative agrees to lend you money is to stick to your promises. Pay it back when you agree to. In fact, pay it back early if at all possible. And in the future, be open to returning the favour.