Financial Literacy - Smart Borrowing
An all white angel and a all red devil playing tug of war with a 100 dollar bill and a red/orange background
personal loan
Borrowing from friends, family: risky

If you've ever entertained the idea of hitting up a friend or relative for some quick cash, you're in good company.

Every year, loan transactions between friends and relatives amount to some $89 billion in the U.S., says Asheesh Advani, chief executive at Virgin Money, a private loan management service. It's a number substantiated by the Federal Reserve Board Survey of Consumer Finances.

If you'd like to get your paws on some of that money and you think someone close to you may be in a position to lend it, how you approach the deal can make all the difference.

Loans between individuals are made all the time for various reasons -- whether to consolidate debt, start an emu farm or to add an observatory to the back of your home. They can be a great investment for the lender and a good deal for the borrower, provided the loan is paid back promptly and that meticulous care is taken to preserve the relationship.

Otherwise, it's just not a good idea and should be avoided at all costs.

In other words, borrowing money from people you know can be a great idea or it can be fraught with more danger than playing hopscotch in a minefield.

The upside is that if you do ask for a loan and friends and relatives turn you down flat, you can always ask a complete stranger for money through a peer-to-peer lending network.

Asking for money

In some ways, borrowing money from a family member or friend is more serious than approaching a bank for the same arrangement. The bank's loan officers won't be at Thanksgiving dinner or barbecuing hot dogs on the patio next door while you're sunning yourself in the yard.

"I would hope that preserving the relationship would take precedence in any negotiation or contractual arrangement, but you will have a leg up if you approach it as a business deal and don't let emotions get into it," says Gail Cunningham, senior director of public relations at the National Foundation for Credit Counseling.

Aliza Garofalo had the gumption to approach her ex-boyfriend with a request to borrow money for a down payment on a condo. But she did so with more than an outstretched hand.

"To show him I was serious about paying him back, I made up a spreadsheet detailing how much I would pay back every month," she says.

To ensure her continued payments, she has a monthly reminder set on her computer and preprinted address labels. "No excuses!" says Garafalo.

Thomas Fox, community outreach director at Cambridge Credit Counseling, recommends that potential borrowers broach the subject in a similar fashion.

Show up with a plan, he says.

"Borrowers should be realistic about what a practical repayment plan would be and not try to borrow more than they can repay. You have to treat it the same as any kind of loan and be realistic," Fox says.

If you're considering borrowing money from someone close to you, first draw up a contract.

"Put it in writing and make it as businesslike as possible. Even get it notarized by a notary public," says Fox.

This will help protect the borrower as well as the lender. In case of a lawsuit, both parties will be held to the terms of the agreement.

To further sweeten the deal, borrowers should put something of their own on the table -- and be ready to kiss it goodbye should they default.

"Offer collateral. If a family member lends you $20,000 and all a sudden you become sick or injured and can't work, how are you going to pay back the loan?" Fox says.

advertisement

If you have a close relationship and have been holding up your end of the bargain, a family member or friend may be willing to work out a deal with you if you hit a rough patch and have trouble making payments for a couple of months.

"It depends how you manage the relationship after the loan is made," says Fox. "If you say you are going to pay someone back $100 a month and then don't talk to them for eight months, they're probably going to say, 'Well, I'm going to take the car as we agreed.'"

Show Bankrate's community sharing policy
          Connect with us
MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed, 0 point 4.32%  0.06 4.26%
15 year fixed, 0 point 3.36%  0.09 3.27%
5/1 ARM 3.37%  0.10 3.27%
 
View Rates in your area Search
Product Rate Change Last week
30K FICO-based HELOC 4.74%  0.01 4.75%
50K FICO-based HELOC 4.51%  0.01 4.50%
100K FICO-based HELOC 4.24% --0.00 4.24%
 
View Rates in your area Search
Product Rate Change Last week
60 month used car loan 2.86%  0.20 3.06%
48 month used car loan 2.79%  0.40 3.19%
60 month new car loan 2.94%  0.10 2.84%
 
View Rates in your area Search
Product Rate Change Last week
1 Year CD 0.90%  0.02 0.88%
2 Year CD 1.02%  0.01 1.03%
5 Year CD 1.59%  0.01 1.60%
 
View Rates in your area Search
Product Rate Change Last week
Balance Transfer Cards 15.71%  0.01 15.70%
Cash Back Cards 16.36% --0.00 16.36%
Low Interest Cards 10.91% --0.00 10.91%
 
Search
advertisement
FRUGAL NEWSLETTER

Discover new ways to cut costs and save more every day. Reduce your spending, not life’s pleasures. Delivered weekly.

advertisement
Partner Center
advertisement

Connect with us