How To Borrow Money From Your Family Or Friends
In certain stressful circumstances, borrowing money from a trusted friend or family may be a relief. However, it is necessary to clear a few issues beforehand since if anything goes wrong, your relationship may suffer.
According to the Pew Research Center, borrowing money from a family member or close friend may help you get by in an emergency and avoid paying exorbitant interest rates. According to the Pew Research Center, 30% of persons in families experiencing income loss resorted to family or friends for aid.
As a result, there are several actions you can take to make borrowing from family or friends as straightforward and trouble-free as possible.
What to Do When You Need to Borrow Money from Family and Friends
1. Determine how much you’ll need.
Before approaching your friends or relatives for financial assistance, determine how much you need. The key word here is ‘need’ rather than ‘desire.’
If you’ve lost your job, cut any needless spending from your budget and figure in the number of unemployment benefits you’ll get.
By just borrowing what you genuinely need, you will be able to repay your friend or family on time and avoid any embarrassing inquiries about how you were able to purchase that brand new automobile when you already had one in the garage!
2. Find a suitable individual to ask for a loan from.
It’s essential to consider the individuals in your life who could be able to assist you financially.
For example, a retired parent may be on a fixed income or may withdraw funds from a taxable account to provide you with the assistance you need. Meanwhile, a family or friend with a well-paying job could have enough money in the bank to give a short-term loan.
3. Tell your lender the truth about your circumstance.
You must fill out an application, lay out your whole financial condition, and sometimes even put up collateral when borrowing money from a bank. You shouldn’t skip this stage because you have a personal connection with the individual you’re borrowing money from.
Putting up a brief presentation that explains why they should offer you the money might help them realize how serious you are about the loan and why you want the cash. Include information such as what you’ll do with the money, how long you’ll take to repay the loan, and how much interest you’ll pay.
4. Make a contract that you will follow.
A simple loan contract may bring peace of mind to your friend or family member and make them feel more comfortable lending money. Having things written down may also help keep both partners honest and avoid future finger-pointing that might harm the relationship.
A loan agreement, sometimes known as a promissory note, is a legally enforceable contract that spells out the loan’s terms and conditions. This may include things like:
- The amount of money you’re borrowing;
- If the lender requires security or charges interest;
- The timetable for payback;
- How much will you have to pay, and when will you have to pay it.
5. Once your repayment conditions have been established, set up a direct debit or recurring transfer.
Most banks enable you to set up automatic transfers from one account to another.
Set up a regular monthly transfer to your lender’s bank account as soon as your payback term starts to automate the repayment procedure.
This will guarantee that you do not fall behind on your payments by mistake.
The advantages and disadvantages of borrowing money from friends and relatives
- It prevents you from being approached by unscrupulous lenders.
- Lower interest rate (and, in general, more liberal repayment conditions) than you may get from a conventional banking institution
- Small-dollar loans between friends may be funded instantly using convenient apps like Venmo and Google Wallet.
- Awkwardness or hurt sentiments are possible outcomes.
- Lack of transparency on loan conditions might lead to misunderstanding and conflict.
- Both parties may be legally exposed if loan paperwork is missing.
- Paying off your debts will not boost your credit score.
- A miscalculated repayment might jeopardize your personal relationship*.
When Might It Be a Good Idea to Borrow From Friends and Family?
A friend or family member may contact you for financial assistance under certain circumstances. You could be asked for a loan, for example, if they:
- Need money right now to pay for an unexpected expense?
- You don’t have enough credit history to get a personal loan or a line of credit.
- Due to sickness or job loss, you don’t fulfill the income criteria for a standard loan.
Do’s of Family and Friends Lending
Only lend money to somebody you can trust.
If you’re lending money with the hope of receiving it back, it’s critical to be informed about who you are lending. Limiting loans to friends or family members, you trust to pay back what they owe will save you money and time in the long run. Nearly a third of borrowers and lenders in the Lending Tree poll, for example, cited adverse outcomes such as anger and bruised sentiments.
It’s OK to say no if you don’t feel comfortable lending money to someone. You may face some resistance, but it’s critical that you only give money when you’re sure it won’t cause the relationship to fall apart.
Limit the amount of money you borrow to what you can afford.
Making a substantial loan to assist someone is a terrible decision if it strains your resources. Consider the money as a gift when considering how much to lend someone. To put it another way, how much money might you lose before it hurts your finances?
That’s not to say you’re expecting you won’t get reimbursed. Instead, it assists you in establishing some realistic lending limits with friends and family so that you do not find yourself in need of a loan later.
Get it down on paper.
When making a loan to friends or family, having a paper trail might help you avoid misunderstandings. Creating a loan contract that both you and the borrower agree to and sign clarifies your duties and provides legal grounds for redress if you need to sue them later to recover your funds.
The following items should be included in your loan contract at the very least:
- Names of you and the borrower
- The date on which the loan was approved
- The total amount of money loaned.
- A minimum monthly payment is required.
- The due date for payment
- If you’re charging interest, the interest rate
- The ramifications of defaulting on a loan
If you’re taking out a bigger loan, it’s a good idea to get an attorney to draft a contract for you. You should consult a tax specialist if you want to charge interest on the loan.
Dont’s of Family and Friends Lending
Don’t take on more debt than you can handle.
This should be self-evident, yet it bears repeating. If the individual to whom you gave the money does not return it on time, or if you have a more challenging difficulty keeping up with your costs as a consequence, lending more money than you can reasonably afford can only cause issues.
Don’t let guilt influence your decision-making.
It’s also crucial that you don’t let shame or other pressures push you into lending money to a friend. If you feel obligated to lend money to someone when it doesn’t make financial sense for you, take a step back and think about alternative ways you may assist them. You may be able to steer them in the direction of alternative options that can help them financially without a loan.
Don’t give someone your credit card number.
Instead of providing money to a friend or family member, you may offer to cosign a personal loan, or you could let them use your credit card in an emergency. You won’t have to pay anything out of pocket this way.
Cosigning a loan, on the other hand, might have an impact on your credit score since the inquiry, payment history, and loan amount will all appear on your credit report.
Furthermore, if someone else uses your credit card to make purchases, you are solely accountable for any debts they accumulate. You should only explore these solutions as a last resort if you don’t get a loan straight.
Is it Legal to Charge Interest on a Loan to a Friend?
You may lend money at a profit as long as the interest rate is within legal limits. Usury laws exist in most jurisdictions, limiting the maximum amount of interest a lender may charge. In addition, the IRS’s Funds Applicable Rate should be considered. Lower interest rates may result in a taxable event.
Is it Taxable to Lend Money to a Family?
Both the borrower and the lender may be taxed on intrafamily loans. Any interest payments made on loans worth more than $10,000 may be considered taxable income. Furthermore, if the lender forgives a portion of the loan sum or accepts a lower-than-market interest rate, it may be regarded as a gift to the borrower, triggering a gift tax.
Why Should You Never Give Money to Family or Friends?
Lending money to a friend or family member may be damaging, mainly if they are likely to default on the loan. This emotional harm is frequently more painful than financial loss. It’s best not to mix money with family members, but if you feel obliged to lend them money, be aware that you could not receive it back.
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