11 Steps: How To Borrow Money From A Friend or Family Member


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Knowing how to borrow money from a friend or family member could be a much better way to get financing than institutional loans, and you probably don’t need a credit check. But whether it’s a smart way to borrow depends a lot on how you manage your debt.

Getting a loan from a friend or family member can be a difficult process, both financially and socially. Yet if you and your “lender” are clear on your terms and take the loan seriously, it can be a smart move for everyone.

These 11 steps will teach you how to borrow money from friends and family, making a mutually beneficial deal for your relationship to survive:

1. Explore all of your borrowing options
2. Take into account financial and social risks
3. Ask the right person
4. Discuss all the details of the loan
5. Create a loan repayment schedule
6. Find a loan mediator
7. Insist on paying interest
8. Don’t over commit
9. Finalize the agreement – and put it in writing
10. Make your payments on time, every time
11. Actively communicate about the loan

1. Explore all of your borrowing options

Before you jump straight into borrowing money from friends, consider whether there are other personal loan options you can turn to first. For many reasons, it may be better for you to borrow from a bank or financial institution rather than someone you know.

You can even apply for financial assistance in addition to a loan. For example, you can ask the person to co-sign a loan if you have bad credit and you wouldn’t qualify on your own. Or you could see if they would be willing to provide the savings collateral to enable you to take out a loan secured by the savings.

If you’re running out of options, you may want to consider alternatives, such as crowdfunding or borrowing from a peer-to-peer lender.

Pros and cons of borrowing money from friends and family
Advantages The inconvenients
● Keeps you away from predatory lenders
● Potentially lower interest rates (and generally more lenient repayment terms) than those you could have obtained from traditional financial institutions
● Small loans between friends can be funded immediately using nifty tools like Venmo and Google Wallet
● Potential embarrassment or resentment
● The lack of clarity on loan conditions can be a source of confusion, arguments
● Lack of loan documents can leave both parties without legal protection
● A successful repayment will not directly improve your credit profile
● A bad repayment could harm your personal relationship *
* According to a 2017 Bank of America poll, 53% of people said they broke their friendship because of money owed.

2. Take into account financial and social risks

Also, make sure that you understand the risks of borrowing money from friends and family and that you are prepared to face them. This type of loan will carry all the same risks as other debts.

You will “enter into a legally binding contract authorizing (the lender) to sue if (you) violate any of the repayment terms,” ​​said Shaolaine Loving, a Las Vegas attorney.

There is also the added risk of damaging the relationship. You can’t afford to assume that everything will be okay. Make sure you’re prepared to borrow responsibly to avoid damaging the relationship.

And think about who you’re borrowing from. Even if you’re the perfect borrower who’s never missed a payment, your lender might have a hard time separating the loan from your relationship.

“A lot of people feel embarrassed about borrowing money from a family member or friend, but if you handle the business transaction properly, it can be a win-win for both of you,” said Carla Dearing, former CEO of a financial welfare company.

3. Ask the right person

If you’re wondering how to apply for a loan, make sure it’s the right person.

Right off the bat, you need to consider the other person’s financial situation and obligations. Asking for a loan from someone who cannot afford it or who does not trust you will put everyone in a difficult and awkward position.

Do not ask to borrow money from a friend or family member who you are not sure can afford to give you a loan. You should also limit your requests to people with whom you have a positive and close relationship.

Just like when you find a co-signer on a loan, be wary of not-so-close friends and family who jump at the chance to serve as a lender. They might have an ulterior motive.

4. Discuss all the details of the loan

When applying for a loan, you need to be upfront about everything you need and ask for. Make sure you cover all the details of the loan, such as the original balance, how it will be paid off, and other loan terms.

“For example, if you want interest or late fees to be added, and if the repayment will be in installments or in a lump sum,” Loving said.

Further: “The discussion should include whether and when the borrower can actually afford to repay the loan,” said financial advisor Lisa Chastain. Make sure you cover “what will happen if the person doesn’t pay the loan”.

Preparing for the worst-case scenario before it happens puts you in the best position to handle it.

5. Create a loan repayment schedule

If you are making installment payments on the loan, outline the complete schedule and share it with the lender.

“Knowing when to expect your payments and when the loan will be paid off in full should allay any anxiety that a family member or friend might have,” Dearing said.

“You show your gratitude for the favor of the loan by making the repayment as transparent and stress-free for [them] as possible, ”she added.

6. Find a loan mediator

While you go through the details of the loan and how to set it up, it may be helpful to bring in an intermediary.

“Find someone who is a neutral party who can help you make deals for both parties,” Chastain said. “Make sure each party feels like they’re getting a good deal and agrees to specific terms, conditions, and a repayment plan for the loan. “

Beware of trading conditions. If your family lender wants to charge a certain interest rate, for example, that’s their prerogative. As a borrower, evaluate other loan options in the same way as if you were looking for a personal loan from banks.

7. Insist on paying interest

Another proof of your good faith as a borrower is to pay interest on the loan.

“Insist on paying interest at a rate of at least what your family member / friend would earn if they put the money into a high yield savings account,” Dearing said.

After all, it’s a favor for you – and paying interest ensures that it benefits both parties financially. You’ll likely get a lower interest rate than a bank offers, and your lender can see their money grow.

“With bank rates as low as they are today (less than 1%), by asking for a loan and offering to pay 2 or 3% interest, you could be doing a family member a favor.” said Dearing.

8. Don’t over commit

At every step, you need to be realistic about your loan and make sure that you don’t borrow more than you can afford to repay. Your relationship will depend on it.

“The borrower should only accept conditions that [they think they] can support, ”Loving said.

If you’re worried about having trouble down the road or not being able to repay the loan at any time, that’s a wake-up call. Go back to the drawing board and rework your chord until you are sure you can defend your goal.

9. Finalize the agreement – and put it in writing

“Protect the personal relationship by creating a clear and fair repayment plan from the start,” said Dearing. “Put it in writing – then stick to it. “

Like the primary promissory note on federal loans, a personalized promissory note is a common way for two people to formalize a loan agreement. Getting the terms of your loan in writing will protect both your interests and those of the lender.

“Having an agreement will allow both of you to be clear about the expectations so that you don’t expect payment prematurely and feel bitter about non-payment if the terms are not set up front.” Loving said.

10. Make your payments on time, every time

Once you agree to the loan and the funds are returned, be diligent in making the payments. You can even check if your bank allows you to set up direct deposits or direct deposit.

“The borrower should not think that just because it is a friend or family member that everything will be fine if [they do] not pay on time and on loan terms, ”Chastain said. “Treat the relationship as they would if it was a bank or an official lender.”

11. Actively communicate about the loan

As you pay off the loan, you should also try to be proactive and communicate regularly about your loan. For example, ask your lender to send you a payment confirmation every time they receive funds from you. It will help you to protect yourself from any errors and resolve any transaction issues.

And if you ever have any problems, tell your friend or family member right away.

“If it turns out that he cannot make the payments as promised, then he should contact you promptly with a realistic proposition of alternative payment options,” Loving said. “This way the borrower doesn’t look like he’s trying to shirk [their] obligations. “

André Pentis contributed to this report.


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