Should You Borrow Money from Friends and Family in Hard Times?

Friends and family are the people you can count on. You’re there for each other when one of you needs moral support. And sometimes, you turn to your inner circle for financial support. But as normal as this is, you may go back and forth on whether you should borrow money from friends and family.

You wouldn’t be the first person to ask. Nearly one out of five of Americans age 15 and up has borrowed money from family or friends, according to World Bank Group. Let’s dive into how to decide if this is a good idea, the pros and cons, and other ways to borrow money.

Should You Borrow Money From Friends and Family?

There’s nothing wrong with asking a friend or family member for a loan. If you’re going through hard times, you may be pleasantly surprised at how much your loved ones want to help out.

Before you decide, take some time to think about what you can do on your own. A loan from someone you know could be your best option. Or you might be better off borrowing money elsewhere or looking into other ways to fix your situation.

Maybe you have a lot of credit card debt or other high interest debt, and you’re not able to make your payments. Some creditors have hardship programs available for clients in this situation. If you haven’t already, call and ask if your creditor can help. You might not need to borrow money from anyone.

With large amounts of debt, also consider whether a relative or friend could lend you enough to get back on track. If so, you could ask them for support. But if your debt feels overwhelming, a professional debt settlement company is probably going to be more helpful.

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Pros of Borrowing From Friends and Family

A loan from a friend or relative could be convenient and more affordable than what you’d get from any other lender. Here are the positives of borrowing money from friends and family:

• Trust is already established. An existing relationship means the other person knows and trusts you.

• You have more flexibility. Together, you and your friend or loved one can figure out a payment schedule that works for your budget. Banks and other lenders are often more rigid in the terms they can offer.

• The interest rate could be lower. Your friend or relative may offer you a low interest rate or even not charge you interest at all.

• Your credit score doesn’t matter. Most lenders check your credit when you apply for a loan. Someone who knows you probably isn’t going to ask for your credit history before they loan you any money.

• It’s easier than borrowing from a bank. Financial institutions may ask for quite a bit of information and paperwork as part of the loan process. Asking a friend or family member for a loan, on the other hand, is something you can do as part of a regular conversation.

Cons of Borrowing From Friends and Family

A loan between friends could have consequences, although many issues are avoidable with proper planning. Here are the potential downsides and what you can do about them:

• Expectations could go unmet. This is a common issue with informal loans, and the lender could feel let down if repayment is slower than they expected. Set up a payment schedule to avoid misunderstandings.

• Negative feelings can come up. You might feel awkward, embarrassed, or even guilty about asking for a helping hand. Make sure you’re comfortable with the idea of borrowing money from someone you know before you go through with it.

• The dynamics of your relationship could change. Once you owe money to someone close to you, one or both of you could feel differently in the relationship. For example, they may start offering unsolicited financial advice or judge the way you spend money. Consider how your loved one would act after lending you money to decide if it’s a good idea.

How to Borrow Money From Friends and Family

If the benefits of borrowing money from a loved one outweigh the negatives, it’s important to have a plan in place before you borrow. You don’t want to enter into an agreement without laying some ground rules.

Get it in writing

Always put the repayment terms in writing. A written agreement keeps both parties accountable and sets clear expectations. Without a written agreement, you open yourself up to miscommunication.

Track your payment history

You could use a spreadsheet or a digital document with a record of the date you made a payment, how much you paid, and your remaining balance. Make it a shared document that both parties can view for extra transparency. A record is extremely helpful if the lender forgets about a payment you made or isn’t sure how much of a balance is left on the loan.

Offer to pay interest and late fees

To show that you are serious about this financial agreement, offer to pay interest and late fees if you miss a payment. This can show your loved one that you don’t want to take advantage of them and are committed to paying them back.

Consider taxes for loans of $10,000 or more

Loans of $10,000 or more could have tax consequences for the lender. The IRS generally expects lenders to charge interest, and the rate must be at least as much as the applicable federal rate (AFR). The IRS provides the AFR on its website. The lender needs to report the interest as income on their tax return.

If the loan is interest-free or has an interest rate below the AFR, the IRS considers the interest that wasn’t charged to be a gift from the lender to the borrower. The amount is deducted from the lender’s gift-giving limit for the year.

Talk to a tax attorney for any questions about tax planning with your specific loan arrangement. You could also just borrow $10,000 or less, as the IRS generally doesn’t concern itself with loans in that range.

Other Ways to Borrow Money

Other ways to get the money you need don’t always involve qualifying for a traditional bank loan. Here are three more methods.

1. Get a co-signer

Instead of asking to borrow money, you could ask a friend or family member to be your co-signer. A co-signer is someone who signs a loan or lease with the borrower and agrees to be responsible for payments if necessary. The presence of a co-signer means less risk for the lender.

For example, if you need help getting approved to rent an apartment or finance a car, a co-signer with a high credit score could help. Your loved one isn’t lending you any money, so there’s nothing to pay back, either.

2. Microlending

Through microlending, individuals or groups of individuals offer small amounts of money to people and small businesses without access to traditional banking services. While microlending is most common for small-business financing, there are also microloans available for individuals.

3. Crowdfunding

You can fund anything from covering medical treatments to paying off student loan debt through crowdfunding. Crowdfunding is particularly appealing because the funds are donated—which means you don’t have to pay anyone back. The key here is to address the purpose and benefit of donating in order to encourage people to donate and be truly transparent with your donors.

Find the Right Option for Your Situation

Sometimes, a loan from a person you know is exactly what you need to get your financial situation in order. Now you know more about the benefits and drawbacks, and how you can set up a loan agreement that protects both parties. You’re ready to take the next step toward a better financial future, whether that’s borrowing money from friends and family or trying one of the other options we covered.