When money is tight because you lost your job, got laid off or you have a lot of debt to pay off, getting a loan to catch up can offer some breathing room and ease stress over financial difficulties. While you may qualify for a debt consolidation loan, sometimes friends and family members may also step up with a loan offer of their own.
But should you take them up on a personal loan? That depends. More than one-third of respondents to a survey from loan marketplace LendingTree said they, “owed a loved one money.”
Borrowing money from family and friends is rife with potential problems such as hurt feelings and resentment if you don’t pay back the debt as planned. One out of six of those respondents said it ruined one of their relationships, with the main reason for 41 percent being, “the loan wasn’t repaid.”
Before you make a case for getting a loan from friends or family, consider five pros and cons.
1. You may damage the relationship
Borrowing money from a friend is nearly always a slippery slope. Your parents may forgive you if you never repay a $1,000 loan but don’t count on your friendship staying the same – or continuing at all – if you welch on repayment to your best buddy.
In addition, every spending move you make after taking that loan may be scrutinized by the lender. If you’re making non-essential purchases and traveling while you owe someone money, you can bet the lender will notice and likely resent you for it.
2. You can save money on interest
Borrowing money from people you know has its cons, but there is also one big advantage. Unless your mom is a loan shark, she’s probably not going to charge hundreds of dollars in interest on a loan or send a thug over to break your legs when you’re late with a payment.
A friend who lends money may cut you the same slack on interest charges, so don’t take their graciousness for granted. Make your payments on time and be grateful for all that money you saved.
3. You may not be able to pay the amount back
Maybe you’re planning right now on getting a higher-paying job, eliminating costly expenses and driving your old car so you can pay back the loan from your best friend or your brother. Often, however, things in life don’t go as planned.
You may not get a better job or your car may die for good and you have to take out a substantial loan for a new vehicle. Or the person who loaned you money may run into his or own financial difficulties and want to accelerate repayment. Then what will you do?
4. You can avoid predatory lenders
If you don’t have good credit, you can become a target for risky lenders and deceptive lending practices. You may even get so desperate that you slink into a payday loan store and pay an extraordinarily high interest rate or hand over your car title as collateral for a loan.
If you’re working on rebuilding your credit and paying off past-due and other debt is part of that plan, taking a loan from someone in your family or circle of friends is probably a better option. Proceed with caution, though. This is your chance to change your life for the better, so hammer away at that loan so you can pay it off as soon as possible and keep the relationship with the lender intact.
5. It’s smart to put loan terms in writing
Unless you’re a true deadbeat, you’re probably sincere about paying back a loan from a friend or family member. So it’s a good idea to put the loan terms and agreement in writing to avoid any misunderstandings later.
What to include in a personal loan agreement: Parties of the loan; amount borrowed; interest rate (if any); date by which the loan must be repaid; expected monthly payment amount.
