If you do not have access to an affordable traditional loan option, borrowing cash from family or friends is one way of getting the money you need.
When done right, a family loan can benefit both you and your lender.
However, as good as it may seem, this option is likely to lead to misunderstandings, uncomfortable situations, and strained relations between you and the family member or friend that has loaned you the money. Whether you are looking to borrow part of a deposit to own your own home, or something smaller, like paying for that flight to your cousin’s destination wedding. Here is a look at some of the advantages and disadvantages of getting a personal loan from a family member.
Lower Interest Payments
When banks are not convinced that you will be able to pay the money they loan you, they tend to charge higher interest rates to compensate for the risk. This makes it hard for people with a limited or poor credit history to borrow from a bank due to the exorbitant loan rates. Family members who know and trust you might offer you the same loan at a significantly lower rate. When borrowing from a family member or friend, pick an interest rate that is affordable but which still gives the person you borrow from a reason to lend you the money.
Interest Income for Your Family
Money borrowed from a credit union or bank is paid back with interest allowing the institution to earn a profit from the transaction. When you borrow money from friends or family, the interest you pay on the loan will benefit them and not an institution. If you know a family member that has a large reserve of cash, he or she might not mind earning reasonable returns on their capital. According to PW Johnson, a wealth management company, intra-family loans offer investors better returns that they would make on bonds and CDs.
Unexpected life events can sometimes make it very hard for you to pay the loan every month as agreed. When you borrow from a traditional bank, late loan payments will often lead to you being required to pay extra fees, and renegotiating payment options is almost impossible. It is also worth noting that some lenders will even charge you a fee for trying to pay off the loan before the agreed upon time is over. Family and friends can offer a more flexible option and are typically more lenient with you.
When dealing with money and family, it is important to set boundaries. This is backed up by the wellbeing professionals at Living Consciously, who find that “there often can be many blurred lines between family, and this can lead to miscommunication and arguments. It is important to discuss your family member’s expectations with your loan before anything happens. Do they expect interest? How long do you have to pay it back? How often would they like payments? Always make sure everything is clear, even if you think it is obvious.”
Strain on Relations
If you are in dire circumstances, a family member might feel obliged to offer you the money you need; however, they might not be comfortable with the status quo. Even if they do not say it, they might be resentful of the fact that you are tying up their money or worry that they might not get it back at all. This could make family events unbearable and could lead to tension between the two of you. To keep this from happening, be realistic with your repayment plan and keep the person who lends you the money in the loop about potential repayment delays.
One of the most common causes of relationship breakdowns between family members is money. The family relationship experts at Thinking Families recommend to “always remember that there are always other ways to get cash, but there is no replacement for your family members. Avoid regret over losing contact with a family member by being respectful and grateful for their generosity to provide you with a loan.
Changing Power Dynamic
Money has a way of changing relationships. When a family member owes you money, he or she might feel like they have the freedom or right to control your life. The family member who lends you the money might start criticising your spending habits and lifestyle choices or could even demand to inspect your banking information.
While making payments in full and on time can help, you still might end up receiving a guilt trip. Experienced life coach, Joanne Antoun often meets people who have experienced such treatment, and have found that “even if you uphold your end of the agreement, sometimes your family members may hold the loan over your head for years to come. If you can, try and only borrow from people who don’t have a history of guilt tripping, belittling and holding onto grudges.”
Limited Legal Protection
Banking institutions and credit unions are obligated by law to provide you with the money and the terms as stipulated in the loan agreement. Family members, on the other hand, might change the payment plan or default on the full loan amount midway through the loan. To avoid misunderstandings and confusion, it is advisable that you come up with a promissory note loan agreement outlining the terms of your loan – repayment schedule, loan amount, and the interest rate.
So before jumping into borrowing money from a family, be very careful about setting up clear boundaries about what all parties involved expect and what is and is not acceptable going forward. Family always trumps money, so it is important to not let a loan threaten your relationships.
Finally, effective cash management going forward may be able to help you prevent such a situation from being required again.
Author Bio: Jessica Stewart is an Australian writer and a Business Administration student living in Sydney. She has extensive knowledge of financial data and project management topics. Jessica has a passion for photography and when she’s not studying or writing, you’ll find her outdoors capturing still shots of perfect scenery.