If you’re struggling for money, or you’ve got a big project that you want to complete but you don’t have the funds upfront, it can be really tempting to ask a friend or family member if you can borrow money from them.
But just because you’re not taking out a formal loan at a bank, don’t treat it as any less important. Often, it’s when borrowing from a loved one that things can go seriously wrong if you aren’t careful.
The pros of borrowing from friends and family
There are some very good reasons to turn to friends and family first when borrowing money. The most obvious is the better terms you will be able to get. Friends and family will often lend you money interest-free (and, in reality, should never be charging any interest unless they’re a licensed lender under the Financial Conduct Authority).
This means you can save money by only repaying the same amount that you borrow. You may have an informal agreement to pay a little extra but this wouldn’t be enforceable if it came to that.
Another benefit is how much quicker and easier it can be, rather than having to go through a long series of forms and credit checks with banks or other creditors.
You shouldn’t just expect to ask for money and get it though, and you should still provide explanations of how and when you’ll be repaying the money.
Yet even with that detail, approaching friends and family is often less stressful than dealing with faceless banks or loan companies, or going into a formal meeting in a branch.
The final benefit is that, depending on the person that you borrow from, you might be able to be much more flexible in how you make repayments. If you take a loan from a bank or dedicated lender, you’ll be expected to make consistent monthly repayments starting immediately.
If your situation doesn’t allow that, then an informal agreement with a friend or family member may let you take a short holiday from repaying, and then vary how much you pay back over time.
The potential issues with borrowing from friends and family
As there are various pros to borrowing money from a friend or family member, there are some cons to think about too. The first being the potential impact on your relationship if your financial situation changes, or you’re unable to keep up repayments for any other reason.
Falling behind with repayments to a bank or loan company is serious and can have a major impact on your credit rating, but fall behind with a friend or loved one and you can seriously damage your relationship with that person, which could be much more valuable to you.
You need to make sure that you are both clear on the plan for how you’ll make repayments, and what you’ll do if you can’t make a repayment at any time. Most importantly, you need to be honest about your situation if it changes. Don’t ignore any problems, as you’ll only make them worse.
Another potential drawback is whether you can get the sort of money you need from a friend or family member. If you are looking for a larger loan, then you may not have someone close to you who can afford to give you the amount you want.
If this were the case, you could potentially look at taking out a guarantor loan instead – this is where you borrow money from a traditional lending institution, but your friend or family member becomes your guarantor – agreeing that should you be unable to repay, they would become liable for the repayments instead. Read more about these here.
And as much as you need to show you can afford repayments, you should also make sure the person lending you money can afford it too. You don’t want them to suddenly try to call in the whole debt early if they fall on hard times themselves, potentially leaving you in trouble or with a difficult decision to make.
Making an agreement and budgeting
With these pros and cons in mind, it is vital you go about borrowing money from friends and family members in the right way. Firstly, you should create some form of written agreement that is a record of what has been borrowed – see some examples here. It’s important you have this written down, as if anything happens that prevents you from repaying, or worse, you were to pass away before repaying the loan – the lender would need this document to reclaim the money from your estate.
Next, create a budget. You should be comfortable sharing your budget with the person lending you money and demonstrating how much money you have available each month to repay them. Make sure you leave yourself enough to live on and to save for emergencies, but then you’ll be able to clearly show what you can afford and agree a reasonable timeframe for repaying the money.
Finally, make sure that the person lending you the funds is comfortable doing so. Consider adding into the agreement that you won’t be able to repay in full early if you’re making repayments on time, to force them to properly consider their position.
Do these, and you should be able to borrow money from a friend or family without stressing, as long as you keep them updated on any changes to your circumstances.