Borrowing money from friends and family could be the hardest thing to process. It could be due to the bond you share, or you never want to bother your loved ones for financial help. However, sometimes, you cannot ignore the cash needs and somehow need help with that.
So, how can you borrow money from your friends and family for your personal and business use? The blog discusses some aspects in detail that might help.
Why do individuals use friends and family loans?
There are multiple reasons one prefers taking loans from friends and family. These are:
One may borrow a higher amount
Getting funds from friends and family does not involve financial checks. Instead, the lending is based on trust, bond, and the depth of the relationship one shares. Thus, one may borrow a higher amount if the loved ones trust you with their money.
Little or no interest rates
Sometimes, individuals lending to someone they know do not charge interest rates. It could be out of the relationship they share or the love. However, even if someone charges it, the interest is still low in comparison to banks and traditional lending options.
Flexible repayments
You generally do not encounter rigid repayment terms when you borrow from one of your family members. You may pay part payments, skip for some time, or switch to a better repayment module depending on your requirements.
However, you can get the same flexibility with unsecured personal finance lenders online. You may get a loan with flexible terms, the facility to halt payments and reschedule one according to the given module. Here, you share the financial protection of the documents and prevent your financial needs from becoming vulnerable. It is a good option if you want to keep your financial matters private.
What should you do before asking for money from your friends and family?
Yes, you need to consider a few things before bothering your loved ones for money. Check whether you genuinely need extra cash or if you can delay the requirement until you can save enough. Here are other aspects that you should consider while seeking money from your friends and family:
Don’t borrow just to delay budgeting
Some individuals just borrow the money from their loved ones to avoid the lengthy budgeting process. It is not ethically and financially ideal to do so. Instead, one must borrow only when one cannot avoid the need or cannot wait until the savings grow. They must develop and grow a savings fund side by side to avoid burdening their loved ones later.
Moreover, confirm that you need money and can afford the payments. It is because most family members may expect you to pay the dues on time. Therefore, work accordingly.
Work out the exact purpose and the amount needed
Check and analyse why you need the money? Is it something that you cannot wait for? Is it a necessity or a luxury? How does it improve your lifestyle? Identifying such things will help you understand whether you need to borrow at all. If yes, it will help you determine the exact amount that you may need to meet the requirements.
Never over-borrow just to avoid the risks of not meeting the needs properly. Borrow only that much that you can repay on time. It will help you ensure good and cordial relations with your family members,
- Navigate the repayment strategy
How are you going to clear the debt? Do you have a payment strategy in place? If not, it is high time to design one. Check how much time you will take to clear the pending dues. Determine the months it may take and how much you can repay monthly, if you have agreed upon a payment plan with the known one.
It is generally ideal to put your agreement in writing. List how much you will pay and when. Keep records of when you make payments and how much you still need to pay. Keep the other person from whom you borrow money in the loop of things. Ensuring transparency in financial matters is very important. It helps you and the other person coordinate around the things clearly.
Also, discuss the worst circumstances and the actions to take in that condition. For example, how would you pay the dues if you lose your job suddenly? You need to discuss the other way to repay the pending payments or borrow extra time for payments. These things should be clear between you and the other person who is lending.
- Structure the loan properly
Borrowing from family is the most cost-effective option. It hosts little stringency regarding payments, terms, and liabilities. However, you should still practice professionalism by structuring the loan properly. Here is what you should check and how to structure the loan:
Check the tax implications: There are hardly any tax implications if borrowing from friends and family. However, if you are paying interest on the loan, then the person receiving it must pay tax on the interest they receive. What they pay depends on the individual tax position.
The amount borrowed and purpose: Analyse and write the amount that you borrow on a written agreement and the purpose for which you borrow it.
Interest rates (if applicable): If you have decided to pay interest or the other person wants to charge one, write it clearly. Understand how much it will cost in future. Check whether there are any penalties.
Repayment terms: include the monthly amount payable, the total amount payable and frequency of payments.
Decide whether you can offer security
In rare cases, you may consider borrowing against collateral from your loved ones. You and the other person may decide whether it must be a secured loan agreement or an unsecured loan agreement.
Providing security may help you borrow an additional amount and avoid interest charges. The security must be priced higher than what you need.
Bottom line
These are some strategies that you may follow to borrow an amount from your friends and family. Determine how much you need, given your requirements. Accordingly, you can define the payment terms and interest (if you need to pay one). Keep terms clear between you and the other person to avoid any conflicts.
