When I began my first out-of-debt journey, I was blessed to have two family members offer to lend me money to help pay off my bills. It helped me in many different ways – but most notably, it provided an emotional lift that I needed at the time.
Borrowing money from family is not a black/white issue. And it shouldn't be taken lightly. There are several things that come into play when you decide to lend to family members OR accept money from other family.
There's no question my generation (and the ones following us) seem more and more debt-ridden than our ancestors. Many of us have turned to the older generation for loans to pay for a down-payment on a house, schooling or even to get by month-to-month. This is scary to me.
As a benefactor of family loans – I know they can provide much relief at a difficult time. And, even if you aren't in a financial bind – borrowing from a family member sure beats paying the bank.
There are definite pluses to family borrowing. Among them:
- Zero to low interest
- Interest is going to a loved one instead of the big bank
- Little / to no paperwork (applications) – doesn't affect your credit
- Family is more likely to give you “grace” in repayment
While these benefits are great – it's really important that you follow a few guidelines that benefited me and my lending family members. I hope they provide some guidance for you too if you are contemplating borrowing money from family.
- Loan only from a trusted family member. Let's face it – we all have members of our family that we don't necessarily see eye-to-eye on. When it comes to borrowing money – you really want to be sure your relationship with your family lender is solid. And by solid – I mean healthy. The last thing you want to do is have your family hold the debt over your head, or to be guilt-tripping you at every function. Ask yourself: Do I trust this person? Does this family member have their financial house in order? Do their intentions in lending the money to you seem apparent?
- Talk it out. It's vital that you get on the same page with your trusted family member. Be sure they know why it is you are needing to borrow money and how you intend to repay them. Be open, honest and listen.
- Get it down in writing. “But it's my family – we can just shake on it!” In an effort to honor the loan – you really want to make sure you are doing all you can to cement the success of your repaying it. One way to solidify this is to get it in writing. I received a loan from my own mother – and soon-after drew out a simple loan agreement which stated the loan terms and when she could expect to see her money in full. This is a crucial step that will keep you accountable and everything clear (here's an example of a promissory note I used with my family members). A few things you'll want to consider: What is the interest rate on the loan (if any)? What will the monthly payment be? How will the payment be made? What if I'm late on a payment?
- Family comes first. If at all during the “lending process” you start to develop friction or things aren't going as expected, it's best to talk with your family lender as soon as possible. If worse comes to worse, you may want to pay off your loan and tear up the loan agreement. Money is something we all need – and is a necessity to live day to day – but to develop a family feud over it is not worth it. Your family is much more important.
- Pay it off quick! There's truth in the Bible referring to the borrower as slave to the lender. And, although you may have a great relationship with your family lender, you don't want to give your freedom over to them by owing them money. Get rid of your debt as soon as possible and free yourself of unwanted slavery.
Have you loaned or borrowed from family members – and how was your experience? Any tips?