I’ll be the first person to warn you about borrowing money from family and friends, but if you really must turn to your pals and relatives for some quick cash, here are a few tips that will help you do it right and keep your relationships intact:
Be Transparent at All Times
Borrowing money from friends and family is taboo because it often causes a rift in the relationship. Many times, expectations aren’t outlined, and the familial waters get murkier with each passing month that the lender doesn’t get paid.
Adds J.R. Duren, a personal finance reporter at HighYa.com, “Always be direct. If you’re going to bring your family or friends into your financial life, you need to be straightforward and transparent — from the point you make your request, to the point where you pay off your debt.”
Explain Why the Loan is Important
If you’re asking a friend or family member for cash, you better have a legitimate reason for borrowing it. Don’t go begging because you need stupid material luxuries.
“Borrowing money to buy something your friend may not agree with, like a motorbike or a lavish holiday, is never a good idea,” says Jennifer McDermott, consumer advocate for personal-finance comparison site Finder.com. “This often leads to resentment as to how you’re spending their money — and that’s bound to cause friction. When asking to borrow money, ensure they know what you’re going to spend it on, and make sure they’re on board to avoid any clashes after the fact.”
Create a Contract
To further establish your accountability, suggest creating a contract that both parties can sign.
“The biggest problem is that people think that friends and family members don’t need to be paid back in time. At some point, your lender will feel that you took advantage of them,” says New Jersey-based attorney Jef Henninger. “To avoid this, write up a valid contract with very clear and specific terms.”
Of course, it’s important to recognize that this contract isn’t just for show. Once you’ve signed it, you are now legally responsible to repay the money, and you can be sued for the amount borrowed — or more — if you fail to honor the agreement.
Insist on Paying Interest
Insist on paying interest at a rate that’s at least slightly more than what your friend or family member would earn if they put the cash in a high-yield savings account.
“The truth is, with bank rates as low as they are these days, you could be doing your family member a favor by asking for a loan and offering to pay, say, 4% or 5% interest,” says Carla Dearing, CEO of online financial planning service SUM180.
Create a Payment Schedule
“Knowing when to expect your payments, and when the loan will be repaid in full, helps ease lender anxiety,” Dearing says. “And you can show your gratitude for the favor of the loan by making repayment as transparent and stress-free for them as possible.”
An easy way to do this is by having a monthly telephone call, at which time you can transfer your agreed-upon payment via a money-sharing service in real time. This also will help keep the repayment front-and-center in your mind by setting up reminders so you don’t subconsciously push it aside.
Keep the Loan Private
If grandma was kind enough to slip you the cash you need, keep it between you and grandma. Your dopey cousin doesn’t need to know that she’s handing out loans so he can buy a new bass guitar for the band. Keep the loan transaction private, for the sake of both parties. You owe that to the lender — along with the money you borrowed.
Photo Credit: Tax Credits
In 1958, my wife and I borrowed money to make the down payment on our first house from her parents, frugal people who had birthed and raised two children during the great depression of the 1930s.
Through the loss of his job and pension a few years before would have been quite enough justification for her father to tell us to go elsewhere for the loan, it was joyfully granted. Joyful is the right word – we had their first grandchild, in late 1957.
His generosity has been burned into my memory and I take this occasion to honor him and add a postlude “how to”: As a personally responsible person, be grateful for the loan and let your lender know it.
Great story, Dave. And I totally agree with you. The unselfish people who loan money to their friends and family member, expression of gratitude is payment enough — and much appreciated!
That’s a treasured story Dave. Thank you for sharing it with us.
You are welcome, Noah.
It’s good to hear from kindred spirits, so, thank you, too.
Hey Mikey,
Thanks for the wonderful tips. I’m those kinds of people who never want to be in debts, especially with relatives. I’ve seen relatives become enemies, thanks to dishonored debts. However, considering the hard-economic times, sometimes circumstances may force one into it. Your tips, if adhered to, can be handy in enabling one to keep the relationship intact. As you stated, it’s always good for each party to be confidential, open and most importantly, be honest. Honesty is the best policy, remember.
Best Regards,
Paul
I do remember a few of my clients whose close connections with family members ended when they can’t pay them back on time. These tips can actually save relationships and avoid creating deeper trust issues.
This was an outstanding article. Thank you.
Thanks for this. I totally agree with all of these tips. I can’t wait to try them out.