Family loans can be a viable solution when you’re financially bound. But borrowing money from family can be a touchy subject. On the one hand, you may be grateful for the help during a difficult time. On the other, you may feel like you’re putting your loved ones in a tough spot.
You can avoid the complicated nature of a family loan by turning to another borrowing option. If your credit card has enough available credit, you can use it to cover urgent expenses right away and then steadily pay down the balance. If you don’t want to use your credit card, you could try applying for a loan by phone to get access to emergency funds. As long as you meet the qualifications for a loan by phone, you just might get approved. Use those borrowed funds to handle urgent expenses and then repay your personal loan through a straightforward billing cycle.
A family loan still might feel like the best option for you. In that case, you’ll want to take some precautions to make sure that you and your family member are happy with the arrangement. You don’t want to risk ruining your relationship. So, read these tips about borrowing money from family.
Tip 1: Keep Communication Lines Open
When you borrow money from family, keeping the lines of communication open is essential. Tell your family members about your financial situation and why you need to borrow money. It will help them understand your situation and make them more likely to lend you the money you need.
Tip 2: Be Prepared to Pay Interest
If you’re planning on borrowing some cash from your family, it’s important to be prepared to pay interest on the loan. It is especially true if you’re borrowing a large amount of money. Charging your loan interest is a way for family members to offset any costs they incur by lending the money.
Paying interest on a family loan can help keep relations strong and avoid hard feelings. Try to repay the loan soon to avoid accruing too much interest.
Tip 3: Create a Repayment Plan
Before you borrow money from your family, create a repayment plan. This repayment plan should include how much money you’ll need to borrow, when you can repay the loan and what method you’ll use to repay the loan. It will help to ensure that you’re able to repay the loan promptly and will help to avoid any misinterpretations between you and your family member.
How can you create a repayment plan? Start by looking at your personal budget to see how much you can afford to dedicate to loan repayments every single month without impacting your ability to cover your essential expenses like rent and groceries. Then, see how long it will take to cover the loan amount. If you want to shorten that repayment time, see what monthly expenses you can reduce for the sake of savings. Put those savings toward your repayments.
Tip 4: Put It in Writing
Any time you borrow or lend money, it’s essential to have a written agreement. This agreement should spell out the loan terms, including the amount of money borrowed, the interest rate (if any), and the repayment schedule. It will help protect both parties involved and provide a loan record should any problems arise.
Of course, you don’t have to write a formal contract. You can simply confirm the terms of the loan with your family member over email or text message.
Tip 5: Be Honest About Your Financial Situation
Honesty is the best policy when it comes to borrowing money from family. Trying to hide any debt or expenses will only make it more challenging to repay the loan. Be upfront about your financial situation so your family can make an informed decision about whether or not they’re willing to lend you money.
Tip 6: Keep Your Word
When you take out a loan from family, you’re not just borrowing money — you’re also borrowing trust. Your family is trusting you to keep your word, expecting you to repay the loan according to the terms that are agreed upon. So, sticking to the repayment plan you’ve decided on is essential. Not only will this help you maintain a good relationship with your family, but it will also protect their finances.
Tip 7: Admit When You Can’t Repay
Sometimes, repayment plans don’t work out. Maybe you overestimated how much you could save after getting the loan. Maybe the rates of inflation are pushing the limits of your budget, and your financial situation is more precarious than you anticipated. Whatever the reason is, there is only one thing that you can do: admit that you can’t repay the loan.
This will be hard, but it’s better to admit this issue to your family member than to string them along and betray their trust. Again, honesty is the best policy. Hiding this fact from them will not only lead to financial consequences but also emotional ones. You could permanently damage your relationship.
Try to come up with alternative means to repay them for their generosity. You may not have enough money to repay them, but do you have time and energy? You could cook them meals, walk their dogs, housesit when they’re on vacation, babysit when they’re busy, etc. Find alternative methods to give back.
Following the guide can ensure that you and your loved ones are happy with the arrangement. So, take the next step and start talking to your family!