Borrowing money from a trusted friend or relative can be a huge weight off your chest in certain difficult situations. However, before doing so, it is important to clarify a few details, as if things go wrong, your relationship could consequently suffer.
Borrowing from a family member or close friend can provide emergency money and help you avoid borrowing at very high interest rates, and according to the Pew Research Center, 30% of people in households that experienced income loss turned to family or friends to see them through.
Therefore, there are certain steps that you can take to make sure that borrowing from family or friends is painless and trouble-free.
Top Tips for Borrowing Money from Family and Friends
1. Figure out how much you need.
The first thing to do before asking to borrow money from your friends or family is to figure out how much you need. The important word here being ‘need’, as opposed to ‘want’.
If you’ve suffered a job loss, for instance, eliminate any unnecessary expenses from your budget and factor in what you can expect from unemployment benefit.
By only borrowing what you truly need, it will help you to payback your friend or relative in good time and avoid any awkward questions about how you could afford that brand new car when you had a perfectly good one sitting in the garage!
2. Identify the right person to borrow from.
It is important to think about the people in your life who might be in a position to provide financial help.
A retired parent, for example, may be on a fixed income or have to draw from a taxable account to give you the support you need. Meanwhile, another relative or friend with a well-paying job may have more than enough in savings to offer a short-term loan.
3. Present your situation to your lender and be honest.
When you borrow money from a bank, you have to fill out an application, lay out your entire financial situation, and sometimes even put up collateral. Just because you have a personal relationship with the person you’re borrowing money from doesn’t mean you should bypass this step.
Preparing a short presentation that outlines why they should lend you the money can help them see how serious you are about the loan and understand why you need the funds. Include details like what you’ll use the money for, how long it’ll take you to repay the loan, and how much interest you’ll pay in return.
4. Set-up a contract to stick-to.
A simple loan contract can provide your friend or family member with peace of mind and make them feel more comfortable providing a loan. Having things in writing can also help keep both parties honest and prevent finger-pointing down the road that could ultimately hurt the relationship.
A loan agreement, often called a promissory note, is a legally binding document that outlines the terms and conditions of the loan. This can include:
- How much you’re borrowing;
- If the lender is charging interest or requiring collateral;
- The repayment timeline;
- How much your payments will be and when they’ll be due.
5. Set-up a direct debit or recurring transfer once your repayment terms have been set.
Most banks allow you to set up recurring transfers to another bank account.
As soon as your repayment period begins, automate the repayment process by setting up a recurring monthly transfer to your lender’s bank account.
Doing this will ensure that you don’t accidentally drop the ball on making payments.