Many people turn to their friends and family members when they need money. As a borrower, you can borrow a personal loan for any purchase or project. From buying a large asset to starting up a business, family-friend loans can be helpful in many ways. This one-time funding can help you take care of your vacations, home renovations, medical bills, etc.
In the event of such borrowings, there are some limitations you need to keep in mind. Below are some recommendations that ought to be considered to avoid defaulting when borrowing from friends or family.
1. Know How Much Money You Need
When borrowing from family or friends, make sure you know how much money you need. Just be realistic, so you don’t have to go back to your loved one to ask for more money. Also, you may end up borrowing more than you can actually afford to repay.
This is especially true if the lender charges an interest on the loan. All these factors can compromise your relationship with the person. So, have a clear estimate in mind and don’t borrow too much or less to avoid creating trouble.
2. Have a Loan Contract in Place
Often overlooked, a proper loan contract provides both lenders and borrowers with peace of mind. It makes them feel more comfortable when lending a loan to you. It outlines the terms and conditions of the personal loan and helps both parties prevent finger-pointing down the road.
Borrowing from friends or family needs to be treated like any other loan. This doesn’t mean that you will need to get a lawyer involved. You can create a standard promissory note using an online template.
3. Keep Records
The paperwork doesn’t stop after creating the contract. You will need to record payments and keep track of the balance of the personal loan. Here, recordkeeping will help with taxes, repayments, and timelines. This will help keep the lender and borrower on the same page.
Keep in mind that tax rules around personal loans can be complicated. So, if you’re unsure of the tax implications, it’s better to consult a tax professional.
4. Prioritize Loan Payments
Whether you’re borrowing money from a friend or family member, making your payments on time should be your paramount priority. Again, the loan agreement should outline the repayments and their timing. You can also set up monthly or weekly automatic bank transfers.
5. Be Upfront
If borrowers are unable to repay family-friend loans, they must make the lender aware of this fact. Elaborate on why you can’t afford to repay the debt. Show the lender a ledger featuring your unavoidable payments and expenses. This would reassure the lender that the borrower is honest and recognizes the importance of repayment.
The Bottom Line
Borrowing from the people you know should be made after considering several of the aforementioned points. As a borrower, you are advised to only borrow what is of utmost importance. You must also remember that the addition of money to a pre-existing personal relationship has the potential to cause irreversible damages. So, handle it with care.
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