When you find yourself in a financial bind, it is often easier to resort to family or friends for a loan. This may be easiest because of the time involved in organising an official bank or financial institution loan and having to meet their requirements. Should turning to friends and family be a first or last resort?
Should you borrow money from a family member or friend, you risk damaging or ending the relationship for a number of years, or for life, where you fail to repay the debt on time.
A close friendship between friends and the caring nature of a family bond can be devastated and broken over money. Any financial transaction should be considered very carefully and then treated exceptionally well during its period of interaction.
Unfortunately, this type of request for money is often at a moment’s notice and must be arranged within a day or two to help the individual through their financial difficulty. Individuals need time to clearly think through the complications and the potential downside about how the loan is repaid and what actions will be taken if the loan goes into default.
It is critical for everyone involved that the terms and conditions are clearly stated, in writing – and practical for both parties. Using this method, there can be no doubt about the details agreed. There is no point in agreeing to repay a loan with a repayment that you cannot possibly meet on a regular basis.
The person lending the money may choose not to charge any interest. This will mean that the person lending the money is effectively losing dollars because they will not be gaining interest in the account where the money was held.
Where a relative chooses to turn the loan over as a gift, it may be in your best interest to avoid the loan because the person gifting the funds will have a hold over you for a long time into the future. You may consistently hear, “but I lent you the money…”
The relationship will work better over the long term if you are able to offer to pay interest, even where you are being offered an interest-free loan. Also, this clarifies that you are aware that they will be losing money if they offer you the loan interest-free.
Repaying the debt is extremely important, particularly where the relationship is to continue. Paying the loan off early will make everyone feel better about the deal and you may win back some respect you may have lost by asking for the money.
When you need to borrow money at short notice, try hard not to let your relationship be turned into a financial transaction, by keeping the two separate. You have to prove and ensure that you will repay the debt properly and you may be able to sell the transaction by offering to pay a higher rate of interest than the bank offers on their savings. It is critical to always keep in mind there is no such thing as free money.