10 Ways Borrowing Money from Your Friends and Family Affects Your Relationships

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Almost everyone requires some type of external funding for reasons that range from getting a business off the ground to paying for a car. It can be difficult to secure the level of financing you need, especially when you are struggling to get a loan with an unfavorable credit history. This often results in many people turning to their friends and family for help.

Although borrowing from people you are familiar with enables you to move forward with fewer challenges, this is a process that can be risky. Taking the right steps towards requesting for a loan and doing your research is essential for making informed choices regarding money and your relationships with loved ones in the future.

Downside to borrowing from friends and family

Benefits of getting a loan from friends and family include lower interest rates and flexibility, but this type of arrangement can also lead to the following issues:

Informality

One of the advantages of getting a loan from a family member or friend is that they do not need legal documents, unlike a licensed money lender or bank. However, when the situation is not clear, it can end up being detrimental when you and the lender do not have the same expectations.

Family members or friends who lend you money might assume that their financial assistance entitles them to your daily life or business. Alternatively, the borrower might assume that it is okay to skip payments from time to time because the lender is a loved one.

Parties that are involved in any transaction can avoid disagreements by clearly documenting the terms and conditions of the agreement.

Awkwardness

Aside from the legal challenges that come with accepting a loan from your family or friends, mixing your finances and personal relationships can also make social interactions awkward and complex.

One of the disadvantages of borrowing money from loved ones is that it may lead to an uncomfortable discussion about your financial situation. While a bank will not discourage you from purchasing another car or tell you that you cannot afford to go a fancy restaurant, family and friends who lend you money may criticize your spending habits.

Borrowing under these circumstances can be embarrassing for everyone involved when the borrower is uneasy and the lender is anxiously waiting for repayment, which can complicate the entire relationship.

Disputes

There may be disputes or disagreements regarding the repayment terms. Lenders and borrowers may end up in conflicts about what the loan is being used for and when exactly the money should be paid back. There can also be misunderstandings about how entitled the family member or friend should be when the loan is used for business purposes.

Giving the money back

It can be hard to ask for repayments when you are dealing with a friend or family member. Since the lender and borrower probably care about each other, the lender does not want to make the borrower feel uncomfortable. With concerns about repayments, communication may break down to avoid discussing the loan, which can lead to hurt and confusion.

Asking for more money

After borrowing money from a loved one, you may be tempted to ask for more money. Additionally, other family members and friends may also turn to the same person for a loan. This constant desire to borrow from a particular person can strain the relationship.

Enablement

When friends and family members lend each other money, this makes it easier for them to get out of financial problems rather than dealing with the real issues and causes. For example, asking for money to get rid of credit card debt does not help to solve the problem of overspending or not sticking to a budget.

Losing relationships and money

Lending and borrowing money presents the risk of not only losing money but losing friendships as well. This can create tension between people along with anger and guilt. With the risk of relationships never going back to normal, it is important to have this discussion about lending or borrowing money. A loan can never be worth the special bond that you share with someone.

Lack of urgency

When a loan is open-ended or there is no formal agreement, you may borrow money without realizing how important it is for you to pay the money back as soon as possible. Repaying the loan may not be a priority because there is no deadline and you will not face repercussions such as a negative effect on your credit score, high interest charges or penalties. You will not be motivated to repay the money promptly or take your payments seriously.

Alternative sources of financing

Getting a loan involves borrowing money from a creditor and repaying the funds as well as interest in the future at a specific time. For the lender or creditor that lends the money, the reward is essentially the interest on the loan amount.

This type of financing may be unsecured or secured. Unsecured loans do not have collateral and the lender has less protection in case the borrower defaults. Secured loans have collateral, which is a significant asset that can be sold to clear the debt in case the borrower defaults.

Financing may be on a short or long-term basis, with varying repayment periods and schedules. Short-term loans are usually used for current activities while long-term loans can be used to make large purchases such as equipment and buildings.

Commercial lenders

Commercial lenders such as banks and credible licensed moneylenders are among the top sources of loans. Some lenders place emphasis on collateral and others are more interested in your credit score. Depending on the type of lender, there will be different determining factors in regard to qualifying for a loan.

If you are considering getting a loan to boost your finances, there are different options that you can choose from. These include traditional and conventional lenders. The following are some factors that you should think about when looking for a lender:

  • Sufficient lending limit
  • Flexibility
  • Reputation
  • Experience

Even though getting a loan from a family member or friend may seem like the easiest way to overcome a financial hurdle, it is advisable to avoid borrowing money from people that you have a close connection or relationship with.

Before borrowing from a family member or friend, you should explore other options such as creating a budget, tracking spending, earning more money and negotiating for better interest rates with current lenders. You may also consider the option of getting a personal loan from a conventional lender.

There are many alternatives when it comes to personal loans. With advanced technology in the lending sector, it has become easier to find the best loans and rates that are based on your needs.

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