There are always situations where we may need a little extra money – and whilst you might immediately turn to credit cards and personal loans, borrowing from family and friends can be a lot more effective.
After all, you are not going to be declined by your parents or best friend due to your credit score or need to wait long for a decision. In fact, borrowing amongst your inner circles is the most popular form of borrowing in the world. Whilst the credit card industry is estimated to be worth $45 billion a year, the amount that is lent out and borrowed amongst family and friends is said to be around double this.
Whether it is buying a new car, new apartment, paying for tuition or setting up a business, the role of borrowing from close relatives and friends is very powerful. But it is important to have the right frame of mind and take precautions, since friendships can easily be ruined over money and finances.
Am I Borrowing For the Right Reasons?
One of the first things to ask is, am I borrowing money for the right reasons? There are some things that justify asking a family member for money, if it truly adds value to the quality of your life or is seen as an investment.
Certainly asking for money to help with tuition, living expenses, business purposes or to pay towards your children’s everyday costs, can be easily justified.
When it comes to borrowing money for something frivolous, like shopping sprees, lavish holidays or to pay off debts – it may not be sensible to asking loved ones for money.
Your family and closest circle will always want to help you, but giving money to someone who already has bad debt or is looking to spend money on something non-essential, may cause some bitterness.
Can I Afford to Make Repayments?
One of the best things about borrowing from family and friends is that you are not likely to be charged interest. If you ask for $500, you will just be expected to pay $500 back. In some very strict families or opportunistic friendship circles, you may expect to pay some interest, but overall this should be lower than other alternatives such as payday lending at 500% APR.
But when borrowing from a bank or private lender, you may face damage to your credit rating and get some unwelcome letters if you struggle to repay on-time.
Meanwhile, if you fail to repay a close member of the family or a close friend, it may create friction and you probably won’t be invited to the next family BBQ.
Putting a Contract or Terms in Place
There is a business case for putting a basic contract or terms in place, when borrowing amongst family and friends.
Dan Kettle of, director of loans provider, Pheabs, commented: “If you are borrowing small amounts, maybe a few hundred dollars here and there, a contract is probably not needed.”
“But,” he continues, “if you are looking to borrow several hundred or thousands of dollars from your Mom or Dad and best bud, there is nothing wrong with putting together a basic one-page agreement or even just an email saying ‘thank you for lending me this amount, I will pay you back in full on these days.”
“To have something in writing is a good way to manage expectations and also show your gratitude if this person is clearly helping you out in a time of need. There is nothing distasteful about putting together basic terms – and doing so, can help you to borrow money from family and friends effectively.”
Avoid Confrontation At All Costs
Money between friends and family can be a very sensitive issue. But provided that you make the terms clear and everyone’s expectations are taken into consideration, you should be able to avoid confrontation – and the whole exercise can be a success!