Should you borrow money from your family and friends?


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Anyone, even a good planner, can find themselves in a financial jam. Maybe you have to move unexpectedly the same month your car breaks down. A mix of adverse circumstances is why you need emergency funds – savings accounts that you only use for, yes, emergencies. (A plane ticket to the Bahamas when you’re feeling exhausted at work is unfortunately not an emergency.)

But maybe you don’t have one of these accounts yet, or it won’t cover the amount you need. Borrowing from family or friends may seem like the second best option. However, consider the risks carefully and consider alternatives, such as a personal loan from a credit union. Here’s how to decide whether borrowing from loved ones is a smart solution or a recipe for resentment.

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Evaluate Your Relationships

In your 20s, if you have a strong, communicative relationship with your parents, they can be obvious.

But before you ask, think about any clues your request could put financial strain on them, said Erin Lowry, author of “Broke Millennial”. Maybe they mentioned that they are saving furiously for retirement or that they still have an expensive mortgage. Or they could plan other big expenses, like the upcoming marriage of a sibling.

Involving friends in your money problems is a major risk. They don’t have to love you unconditionally, and you might lose their respect if you don’t repay them. Elijah Kovar, a financial advisor at Great Waters Financial in Richfield, Minnesota, said he has loaned money to friends a dozen times and been paid back once.

“The biggest problem with this is less of a financial problem. It’s a relationship problem, “he said.” It can hurt a person’s opinion of you and your reputation with them. “

Decide if you’re willing to put this friendship on a level playing field for the time it takes to pay off, and maybe a long time after.

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Make a specific repayment plan

The amount you need will determine whether borrowing from your family and friends is a wise choice and how the repayment plan will be structured.

Some family members might not want reimbursement for a one-time claim of a few hundred dollars, and taking them out to dinner in the future will be enough, Lowry said. In most cases, however, and especially for larger amounts, be realistic about the repayment deadline and show yourself that you are committed to doing so by a specific date.

Create a written agreement outlining the repayment plan, perhaps related to your payroll schedule or an expected bonus or tax refund. Offer to include interest, even if the lender refuses, said Diane Gottsman, etiquette expert and author of “Modern Etiquette for a Better Life.”

Borrowing money invites a potential change in the power dynamics between you and the lender. But when you make a repayment plan and communicate regularly, it’s inappropriate for the lender to bring up the loan in every conversation or in front of others, Gottsman said.

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Explore low-interest alternatives

If you decide that borrowing from the people in your life isn’t worth the risk, you might be looking to credit cards. But if you don’t have a long-term plan to eliminate debt, the interest could make it a bigger problem.

With a credit score of 690 or higher, you might qualify for a zero interest credit card, which might give you a bit of a break, but don’t carry your balance beyond the interest-free period. . Another option, especially if your credit score is below 690, is to look at personal loans from your local credit union. You will need to become a member, but you will benefit from relatively low interest rates. Federal credit unions cap loan interest rates at 18%, according to the Credit Union National Association.

Learn from the process

If you are borrowing, consider the experience as a motivation to build financial security. Top your savings by cutting back on unused subscription services, pricing cheaper cell phone plans, or setting aside a portion of your next bonus. Having an emergency fund – ideally with six months of basic expenses – won’t just mean the freedom from having to borrow money. Using your own savings to cover unforeseen costs can also be an “I did it!” »Stimulating. moment, encouraging you to keep good money habits.

This article was provided to The Associated Press by the NerdWallet personal finance website.

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