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Can borrowing from family and friends work?

Posted 02 April 2016

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How do you feel about borrowing from friends and family? In the right circumstances it can work – here’s how to make sure nothing goes wrong.

Almost all of us can say that we’ve borrowed from friends and family at some point in our lives. Who hasn’t asked a friend to buy them a drink when they’re strapped for cash? Or gone to the bank of mum and dad for a little loan? It’s considered normal, to a certain extent, to borrow on a casual basis from people you know. 

But is it ever a good idea to borrow more than a little? And what happens if you can’t pay them back? In this blog, we’re going to look into the sometimes murky world of borrowing from friends and family, including how to go about doing it sensibly and what to do to solve the problem if you can’t pay them back. 

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The pros 

So, like all types of borrowing, this area has its pros and cons. One of the obvious pros is that it may be easier to get approved for the credit! It’s certainly less formal and daunting asking someone you know for a little financial help than it is walking into a bank and asking a stranger. 

Of course, you’re also unlikely to find that you’ll have to pay interest on what you borrow, so it could end up saving you money in the long run. Because of this, it can sometimes be preferable to approach a trusted family member or friend for help, rather than taking out a high-interest, short term loan, which may end up costing you a lot.

Also the repayment term is likely to be flexible, and if you miss payments it won’t cause any damage to your credit score. 

The cons

Of course, the biggest downside to this type of borrowing is that you run the risk of damaging your relationship with someone close to you. If money isn’t repaid when it’s promised, the lender can feel taken advantage of, or even angry. And if all the lender does is mention the fact that they’ve lent you money, you may start to feel stressed or resentful – two things that certainly have the power to damage an otherwise healthy relationship. 

While the informal approach that most people take to this type of borrowing can make it a great option, it’s also the thing that can make it a little risky. 

Is it ever a good idea to borrow from friends and family?

This type of borrowing can work sometimes, but it’s very important to put some rules in place from the beginning which outline exactly how it’s going to work. Here’s a checklist of things to consider when borrowing from friends and family.

• Do you have a good relationship of trust between you and the person you’re hoping to borrow from, or is the relationship already strained?

• Have you looked carefully at your budget and planned out exactly how you’re going to pay them back?

• Do you know if they want to charge you interest?

• Are you completely certain that you can’t save for whatever it is you need the money for?

• Have you put together a written agreement that you can both agree on and sign – this can save a great deal of trouble further down the line. 

• Have you considered how you’ll feel if they don’t agree to lend you the money? They may be cautious if someone has failed to repay them before, or they might be experiencing cash-flow problems themselves. 

• Is it appropriate/realistic to ask for the amount that you need?

What needs to be in your written agreement?

As we’ve outlined above, creating a written agreement can be a great way of making sure that you both agree on how the borrowing should work. If someone close to you does agree to lend you money for a bit, here are a few things you need to put in that agreement to make it really useful to both of you:

• How much are you borrowing and what is it for? Don’t be vague about how much you need. It’s probably not a good idea to say something along the lines of “I need some money for car repairs.” They could initially say yes to helping you, only to find out that it’s a major repair and they can’t cover it. This could be frustrating for you and embarrassing for them. 

• How will you pay it back? Do you intend to pay it back all in one go, when you get paid for instance, or will you need to pay in instalments? If it’s instalments, you need to write down how much each instalment will be and how long it will take you overall. Make sure the lender realises how long they’ll have to wait to get everything back. 

• What will happen if they suddenly need the money back? There needs to be a couple of “what ifs” thrown in the agreement too. So, what if the lender suddenly finds that they need the money back? Do they have an emergency fund to cover themselves?

What will happen if you can’t pay the money back? This one is very important. Of course, you should make clear your intention to pay the money back, but unexpected things can crop up in life. If you’re self-employed for instance and you lose one of your clients or contracts, you may find that you’re not able to pay it back as soon as you’d hoped. Would the lender be ok with waiting a little longer? Or, if you’re late repaying, is that the point at which they would want to charge you interest?

 

Hopefully, this blog has been food for thought and you now know what you need to be thinking about if you’re considering borrowing from someone you know. Ultimately, only you will know the particular dynamics of your relationship with the people in your life and whether it’s a good idea to borrow from a certain someone. After all, this could all work brilliantly with one family member or friend – and be a complete disaster with another. 

If you’re already struggling with debts, don’t forget there’s help available. There are a range of debt solutions out there and we specialise in guiding you to the right one. Debt solutions can offer a way to deal with all your unsecured debts – including debts to family and friends, so make sure you do some research and seek professional advice if you’re finding it difficult to repay them. 

 

by Christine Walsh

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