The Pitfalls of Borrowing From Family or Friends

Are you considering a loan from a family member or friend? Are you familiar with the many ways this could benefit your finances?

The advantages of this type of loan are well documented. In addition to a lack of paperwork, you may find somebody who is willing to loan you the money interest free.

Does it get any better than that?

While you may be attracted by the many benefits of borrowing from family or friends, you must also become familiar with the potential pitfalls. Here are three to keep in mind:

• The possibility that you may be unable to repay the loan. This is the biggest problem, as an inability to repay the loan will likely put a serious strain on your relationship.
• Social awkwardness. Whether or not this should be a problem doesn’t matter. For many people, both the borrower and lender, a loan that’s “hanging out there” can make things awkward.
• Lack of clear terms. This is something you can avoid with the right approach, but many people never take the time to discuss terms and conditions. Neglecting to do so often leads to a situation in which you don’t know how much to pay each month, the amount of interest (if any), or the term.

By now, you realize that there are many pitfalls of borrowing from family or friends. But here’s the good thing: you can avoid some or all of these by doing two things:

•    Treat the loan the same as you would if a traditional bank was the lender
•    Set clear terms and follow them, no matter what

If you know a family member or friend who is willing to lend you money, think long and hard before you accept the cash. It could be the best thing you do from a financial perspective, but it could also cause you more harm than good.

Have you ever borrowed money from family or friends in the past? How did this work out for you? Would you do it again? Share your thoughts in the comment section below.