Friends and family are among the largest banks in the US, amounting to $189 billion each year. There’s a lot of cash flowing between the people you trust, but this often comes with some limitations. For instance, it can be awkward to agree on the terms and timelines when borrowing family-friend loans.
While there is nothing wrong with borrowing money from a friend or family member, especially considering that they might lend you the capital, you should be aware of the following things.
1. Lack of Clarity
The informal nature of family-friend loans doesn’t involve any reams of paperwork that are associated with traditional bank loans. This may cause a lack of clarity and documentation, where the timeline might not be clear.
As a result, misaligned expectations may occur between the two parties. So, it’s in the best interests of both parties to have a contract in place, which outlines the terms and conditions of the loan.
2. Differences in Relationships
Not everyone in your family or friend circle is necessarily happy to lend money. In fact, some may feel forced to do it. Others may agree to lend the loan, but may put themselves in a risky situation of their own.
Such scenarios don’t bode well for both parties. In fact, this could result in a breakdown of a previously happy relationship, especially if the borrower is not able to pay the money back.
3. Tax Implications
Under certain circumstances, borrowing family-friend loans may introduce tax issues. They often come with an additional financial and administrative burden. For instance, loans greater than $15,000 can be taxable under Federal law.
While lenders are allowed to charge a reasonable amount of interest, they also have to pay tax on the income earned from the loan. To avoid this burden, it is better to document non-bank personal loans.
4. Social Awkwardness
The lender may expect to receive the next repayment and is likely to send you a reminder. However, you may feel socially awkward when you are not able to make the payment on time. This often creates a sense of disbelief. The solution is to keep the channels of communication open with the lender.
5. Bad Habits Nurtured
People who borrow from friends and family members but never pay back will likely continue to ask for more cash in the future. This may nurture bad habits and continue the cycle of bad behavior until people won’t stop lending them. This makes more sense when it comes to close family relationships.
Final Thoughts
If you are in desperate need of a loan, borrowing from friends and family members could be a great alternative to traditional bank loans that are long and frustrating. However, you should try to avoid the above-mentioned pitfalls. Not sure how? Try using the Janji-Ku app – your one-stop digital solution to lend or borrow family-friend loans.