On the surface, borrowing money from family and friends might seem less complicated than taking out a traditional loan—you get little to no interest rates and don't have to worry about hurting your credit score. But that doesn't necessarily mean that borrowing from loved ones is ideal.
Loaning money from someone you know is tricky, and even the strongest relationships can go sour when it comes to money.
However, if you're in a predicament where approaching a peer or relative for cash is the option you’re contemplating, know and understand that there a right way to do it.
DOs and DONTs of Borrowing Money from Family and Friends
Here is a list of DOs and DONTs to avoid a falling out.
1. DO treat it as a business transaction
You may be dealing with someone you know well, but take the emotion out of it—treat the loan as a business transaction. As with any other formal agreement, pitch your proposal and show your peer or relative why you deserve the loan.
Prove that you've thought it through, and you have an agreeable repayment plan ready. This way, you'll be reassuring them that they won't regret loaning you cash.
2. DO offer collateral
Again, it's key to have a solid repayment plan. "I'm good for it" won't cut it.
When you loan money from banks or pawnshops, you usually offer collateral as security. Although your family and friends might not require the same, consider offering something they can hold on to anyway. This shows that you're committed to repaying the loan.
When you are done settling your debt, you'll be able to get back your collateral. It shows that you have a backup plan should you default. It's a win-win situation.
3. DO put your agreement in writing
Once you've agreed on the payment terms, such as the loan repayment period, interest rates, and other conditions, put them into writing. This may seem excessive for an informal loan from a peer, but a business transaction requires such.
Drafting up and signing an agreement protects both you and the lender. It helps avoid disputes over details like the amount owed or how much your collateral is worth.
Both you and the lender should have a signed copy so that when questions come up, you can easily revisit the signed agreement to clear any confusion.
4. DO keep your promises
Informal loans are built on trust more than anything. Your family or peer is lending you money on relatively flexible terms because they trust that you will pay them back.
To avoid damaging your relationship, follow through on your promises. Pay the amount you owe on the schedule you agreed on.
5. DO go above and beyond when possible
If your financial situation eases up and you have the means to go beyond your original agreement, do it.
To thank your family or peers for their generosity, consider paying them back sooner or giving them a token of your appreciation.
This goes a long way in showing how grateful you are for the favor.
1. DON'T ask for more money
Let's say you need a certain amount of money, but your relative agreed to lend you less than what you asked for. Don't renegotiate as you don't want to be pushy.
Aside from possibly straining your relationship, you might end up putting them in a difficult position, too. You may be in a financial pickle, but you don't want your friends or family to be in a similar situation by lending more money than they can afford to.
Alternatively, you can loan from different people to get the amount you need. You might also want to take a look at a formal loan from a pawnshop or a bank, especially if you need a large sum. Each comes with its pros cons, so research pawnshop loans vs. other loan types to determine what to choose based on your financial situation.
For example, if you're worried about your credit score, you might want to look at pawnshops' collateral-based loans. On the other hand, if you don't have anything material to offer as security, banks are your best bet.
2. DON'T lash out
You've probably heard of situations where borrowers get mad when lenders remind them to repay loans. Being in a financial pickle is stressful, but that doesn't give you the right to lash out.
At the end of the day, the loan was a favor to you—your loved ones aren't obligated to lend you money.
3. DON'T make it a habit
No matter how okay they seem to be with loaning you money, borrowing from your friends or family is best viewed as a last resort.
Financial assistance from them can have damaging results on your relationship. Instead, try to start a savings habit, no matter how small. Building your funds can help you avoid financial crises in the future.
Getting financial assistance from friends and family definitely has its perks, but it also comes at a cost. Although it may seem ideal at the onset, know that loaning from loved ones often leads to tension, so keep in mind the DOs and DONTs above to avoid a rift with the people you care about.