Borrowing money from family and friends is one of the oldest and most popular ways of getting access to finance. On a daily basis, it might start with borrowing $10 here and there for drinks or tickets to a show, but on a larger scale, it is one of the main sources for funding big purchases, especially from parents to children, who may be helping to buy a new car, a new property or for starting a business.
But it is also widely known that money amongst friends should not mix – and if not handled well, it can lead to conflicts, falling outs and even legal action.
With this in mind, we give you some of the key things to consider when borrowing money from family and friends.
When is borrowing money from people you know a good thing
Borrowing money from family and friends certainly has its place. In times of need such as funeral costs or household repairs, the trust and bond that you have between close family and friends can help you get through a difficult time.
For these kinds of expenses, the lender is also likely to be a lot more patient and considerate in terms of repayment – and they would not be lending out the money if they expected it back quickly or at all. It is purely because they want to help.
Similarly, when your parents give you money to buy your first car or get on the property ladder, there is no real expectation to repay and no doubt your parents receive joy from helping you during this important milestone in life.
Furthermore, if the person has been turned down for a loan due to various reasons, such as bad credit or no credit – this can be a better loan option than using a loan shark, payday loans or high cost loans, which are very prominent in areas such as Nevada, Texas and California.
When borrowing money turns sour
Borrowing money from people you know can turn ugly if the expectations are not met. Whether it is a small or large amount, it can get a bit hairy if the lender is expecting repayment and this does not materialise within the expected timeframe.
The purpose of how the money was spent is also key here. If it was used for a personal or emergency expense, this is likely to result in more patience and need for fast repayment.
If the reason for borrowing is not disclosed and the borrower is seen living a lavish lifestyle or making poor life decisions e.g alcohol, drugs – this is likely to cause resentment and lead to an unhappy friendship or relationship.
Should you have a contract?
If you are lending out money to a friend and expecting repayment, there is an argument to put a contract in place, even if it is just a one-pager or written up casually on a piece of paper.
This achieves to formalise the agreement and above all, it manages expectations including the amount borrowed, when repayment is expected and any interest (if this applies).
Even just a basic email that highlights the terms is something that can legitimise the transaction and there is nothing wrong with this amongst friends. Although, you should probably avoid a lengthy agreement sent by your lawyer!
Make sure you manage expectations
Overall, borrowing amongst family and friends is just about managing expectations. You want to avoid conflict and any bad feelings, and if it works out, maybe even borrow money again. But knowing exactly the purpose of the loan and when repayment is expected are the most vital things to ensure that the transaction goes smoothly and the relationship remains strong.