8 Rules For Borrowing Money From Friends And Family
With the economy in pits and job losses mounting (December is expected to be another horrible month), a lot of people out there are going to need to borrow money to pay the bills. Unfortunately, few banks are going to be willing to lend you money without a steady source of income and even funding from peer-to-peer lending sites such as Lending Club (aff) is likely to dry up (although it never hurts to try). For many, that leaves friends and family as their only source of cash.
Those close to you are, of course, the most likely to be willing to help out, but they’re also the most dangerous people to ask for money. Should things go wrong and you end up unable to repay what you’ve borrowed, you run the risk not only of financial hardship but also of ruining previously-strong personal relationships and perhaps even starting an old-fashioned family feud. Because of this potentially disastrous pitfall, there ought to be rules-of-etiquette in place to govern borrowing from friends and family. I couldn’t find any on the internet, so I’ll make some up myself. Let this rules of etiquette be forthwith etched in stone, forever and ever.
Rules For Borrowing From Friends And Family
- Borrowing Should Be A Last Resort – Don’t even think of going down that path until you’ve exhausted every other possibility including cutting the phone/cable, eating every meal at home, looking for part-time work, and applying for unemployment. Asking your parents or a sibling for cash when you don’t really need it will undoubtedly stir resentment and give your a reputation for being irresponsible.
- Spell Out Exactly What The Money Will Be Used For - Many people would be glad to help so long as they knew the money wouldn’t be spent foolishly. Borrowing to pay the rent is acceptable and worthy of pity. Borrowing to pay off last year’s vacation is not. Make a request like that and you’re likely to be the topic of many a private conversation about “irresponsible cousin Vinny.”
- Stick To Your Word - If you tell everybody the proceeds from their loan will go towards paying for little Sarah’s cancer treatment or fixing the family car so you can drive around looking for work, stick to your word. If your generous benefactors find out you’re blowing the cash on beer and lottery tickets instead while your car sits rusting in the drive, you can be sure they’ll never lend you money again and will resent you for the rest of your life. I hope you enjoy Christmas dinner at the kids table, because none of the adults will speak to you.
- Get It In Writing – Borrowing from a family member should be no different than borrowing from a bank. Write up a contract specifying the amount to be borrowed and terms of repayment, including the interest rate, due date, and size of any periodic payments that are to be paid. Then, both of you sign it. In blood, preferably. Sounds cooler.
- Avoid A Lump Sum Payment At The End – Sure you have three years to repay the loan, but avoid repaying it as a lump sum at the end. This almost never works out. Instead, calculate a monthly payment, write it into your contract, and stick to it. Make paying back the loan a monthly bill just like your mortgage and credit card bill.
- Keep It All Business – The key to avoid ruining personal relationships over money is to keep it all business. Do not expect anybody to cut you slack just because you happen to share a few genes. Do not, under any circumstances, even ask. This is a business transaction, pure and simple. Keep your personal feelings out of it. If you default on the loan, acknowledge your lender’s right to take you to court over it. It’s part of the game and crying fowl over it will only serve to drive a wedge between family members.
- Avoid The Appearance Of Wastefulness While The Loan Is Outstanding – This is an important one. If you borrow $3000 from Uncle Fred and then go out and purchase a $1000 television a few months later, you give Uncle Fred the impression you don’t really take your debt to him seriously. Even if you are completely current on your monthly loan payments, Uncle Fred will resent your purchase, right or not. If you have an extra $1000, give it to Uncle Fred to pay the loan off early. Remember, Uncle Fred did you a favor when nobody else would. He is not a bank and doesn’t have the luxury of merely writing it off as a “bad loan.” The consequences here are far, far more severe and will touch every aspect of your life. Besides, he probably needs the money back to pay his own bills.
- DON’T BORROW MONEY FROM FAMILY OR FRIENDS! – What are you, stupid?
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The worst is borrowing money to pay off debt where they end up being more irresponsible and owning more debt. I do not understand why people tend to think that actually solves their initial debt problem.
I don’t want to judge anyone’s situation but I totally agree with the last sentence. Maybe it’s just my family but I know for a fact I would hear smart ass comments about the money for a long time. I would rather get a loan from a bank because at least they won’t judge me or make ignorant comments.
Try ZimpleMoney.com! You can manage loans for free or use a low cost product to keep your family & friend loans professional. If you’d pay a bank why wouldn’t you pay family?
Friends shouldnt loan or borrow money but I think its sad that 2 people who are good friends would let money destroy their friendship. Why cant both parties just be honest and honor their agreements?
IF someone is going to borrow money from a friend and a friend CAN lend it (as opposed to GIVE it), then I think this is a good article to follow. Another thing I would add in is to put everything in writing. The party who is paying the money back should also cover themselves as well.
Each time they make a payment, there should get a receipt or have the ‘lender’ sign something saying they paid. This should be agreed upon BEFORE the money is loaned and the friend should let the lender friend know that they will want receipts for payback and will sign a form saying that they DID borrow the money.
People have faulty memories and it’s easy for someone to forget that you’ve paid them back this month. Professional lender services can track when you’ve paid back but friends just handing money over might forget it in their busy lives. So it’s best to keep records that you’ve paid back. This way IF a misunderstanding ever arrives, you can just show them the document and pinpoint it to the exact day and time.
It would seem kinda strange but trust me it’s better than not proving you made a payment and being seen as a leech or thief. Trust me the person who forgot that you paid will feel awkward if you cant prove it because all they will be thinking is that you’re trying to screw them over. They will feel MUCH better when you prove that it’s been done. Don’t make them feel like it’s their fault they forgot either.
Lastly, it should be confidential between the two. The last thing friends need is other friends butting in and putting in their two cents. Trying to convince the lender that they should have gotten more interest or telling the borrower he got screwed on the interest rate. Even spreading rumors about how one is bad-talking the deal. When information leaks, people ALWAYS interfere. Whether they have good or bad intentions, they tend to always put their two cents in and it DOES affect the parties involved.
All in all, If both people agree to an agreement and follow their ends of the deals with a paper trail, AND keep it between the parties involved, I don’t see how a friendship would be in jeopardy.
I borrowed from my mother with a promissory note @6% simple interest, when my mother was gifting to her children a sum, they refused to honor my promissory note, they (older sister & brother came up with this idea) deducted the borrowed amount plus 8% compounded interest, saying it was the potential the money could of earned if it had still been in my mothers pot. The interest was more than the loan, the lawyer I spoke to asked me if my family has feelings for me that I maybe unaware off. And here I thought it was love all along. Don’t borrow from family, you will regret it for the rest of your life. C