Lending Among Friends and Family

Getting a loan is difficult for some people. It could be because they have bad credit, they are too young to have credit history or banks do not think they have enough income to pay off a loan and its interest.

Whatever the reason, there are many Americans who turn to their friends and families looking for a loan. In fact, $89 billion worth of money passes between family and friends in America each year. There can be advantages to this method. Your friends and family may offer you a loan without interest rates. If they do make you pay interest, there is a good chance they will give you a better deal than you would get from other lenders.

However, whether you are a borrower or a lender, there are dangers that come with these types of loans. There are questions you should ask yourself before entering into this sort of agreement. The information below will help you decide whether to pursue this type of loan.

When to Borrow from Friends or Family

Before borrowing from people you know, it is worth examining your other loan options. Borrowing from a lender can be intimidating, but by borrowing from someone you do not know, you prevent the possibility of losing a friend or having a falling out with a family member. Consider the type of loan you can get given your current credit score. If you do not know what your credit score is, do not worry: you can request your credit score from any of the three major credit bureaus. This sort of request is known as a ‘soft pull’, and it will not negatively impacting your credit.

Once you know your credit score, you will be able to determine which sort of loans you have the greatest chance of getting approved for. If your credit score is 670 or higher, it should be possible to get a good loan without turning to friends or family. If it is lower than that, a personal loan will still be possible, though if your credit score is below 580 you will have difficulty getting approved for a majority of personal loans.

Here are some situations where you may feel the need to borrow from someone you know:

  • When you are starting a business
  • When an emergency arises that would otherwise force you to take out a payday loan
  • When your credit score prevents you from getting a different type of loan and you truly need the money

When Friends or Family Ask You for a Loan

If someone you love asks you to give them a loan, you may feel like a bad person for saying no. However, you have to respect your own feelings and financial needs. If you feel uncomfortable with the idea of loaning to your friend, you could simply be aware of the fact that you cannot afford to lend money right now. Given the nature of these loans, they are not secured, and you may lose all the money you give to your loved one. If losing that money will seriously impact your life, it is not worth moving forward with the loan.

However, you may feel uncomfortable with the loan even if you can afford to pay it. In this case, you may sense that the real problem your loved one is having cannot be solved by a quick loan. They could be spending more than they should, or they may just have unrealistic views of their finances. Either way, it can be uncomfortable to simply say “no.” The solution is not to loan the money. Instead, you need to stay firm and say no, while offering your friend a different form of help. There are two steps you can take to provide your loved one an alternative to a loan:

  • Determine why they feel the need to ask for a loan. Are they making unwise financial decisions, or do you think they need to save more money before moving forward with a plan?
  • Find the form of help that best suits your friend’s or relative’s needs. You could help them see a therapist, or you might sit down with them and help them formulate a budget.

Though it can be difficult to say ‘no’ to someone you love, doing so may actually help them more than a typical loan would. If you feel like you do not want to loan to someone, that can be a good sign that they need your thoughtful help, not your money.

How to Properly Handle Loans Involving Friends and Loved Ones

Whether you are giving or receiving a loan, there are a few steps you should take to ensure that hurt feelings are minimized. First, make sure to get the terms of loan in writing in the form of a contract. This makes all aspects of the loan clear and professional, which helps if anyone forgets the terms they agreed to later on. It also serves as a signal from both parties that they are taking the loan seriously. This encourages the borrower to pay back the loan as is enumerated in the contract, just like they would pay back any other loan.

 

Lenders should also consider whether or not to charge interest on the loan. This is not necessary, but it is worth considering if you are worried your loved one will not pay the loan back in full. Interest collected could be a way of mitigating this. The extra money you collect during the early part of the loan can be used to offset the loss that occurs if your loved one does not pay the loan back in its entirety.

Finally, if the lender is going to be strict with the loan, both the borrower and the lender should be clear on what happens if the loan is not repaid. If the lender is stretching the budget for a loved one but really needs them to pay back the loan, let them know that you may pursue them for the debt and consult an attorney. If the lender can afford the loan but does not want to be treated like a piggy bank, he or she needs to make it clear that he or she will not lend any more money before the original loan is paid in full.

In general, though, it is not worth lending money to a love one that you cannot afford to lose. Instead, a loan should be thought of as a gift by the lender that they hope to get repaid. Friends and families who give loans are almost always well-meaning, but it is not worth lending someone money if you are going to be bitter over a defaulted loan. That can ruin a relationship, which is a price no one should have to pay.

 

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