Unless you live in a post-capitalist society, you’re probably going to run into a financial emergency at some point. Hopefully, you have an emergency fund already prepared for something like this, but if not, you may need to borrow money to get through it. This is especially true if the financial emergency affects your car or your body or anything else that’s vital to your day-to-day life. If your credit is in a good place, you can take out a loan with a relatively low interest rate. If your credit is in a bad place, then your options are more limited.
But there’s one way to take out a loan with zero-to-reasonable interest rates, even if you have terrible credit. It’s called the First Bank of Friends and Family. It can be incredibly uncomfortable asking loved ones for help, but it’s an option worth considering as long as everyone involved has clear expectations.
To borrow, or not to borrow
Before we get into how you should ask friends or family for help, it’s worth figuring out where that option should rank in your consideration.
There are certainly obvious advantages to borrowing money from friends or family. Depending on how well you get along, you may not need to pay any interest at all. And if you’re relationship is on good terms, they should be more accommodating than a bank or other lender would be. And though you might feel weird asking, if you forced to take out a high interest, short-term loan, you may be in a worse financial position should your friend or family ever need help one day.
But some believe that asking friends or family for money should be a last resort option. “First of all, you should avoid asking them at all costs,” financial expert Debbi King told us. “No matter what plan you have in place, there will always be a tenseness in the relationship possibly even after the money is paid back.”
Make sure you have a plan
As King mentioned above, you don’t want there to be any more hurt feelings or tension than is necessary. That’s why she suggests you: “Develop a plan that is beneficial to both parties – one that will help you out without hurting the family member or friend. And then aggressively plan on paying back the money before anything else.”
She even offered a personal example from her own family: “Many years ago, my mom borrowed money from her dad to buy her first car. She was supposed to pay him back a small amount each month until it was paid. She actually paid him off every week and paid him much more than agreed upon. To her, paying my grandfather back was the most important thing right behind housing.
“What she did 50 years ago still works great today. If and only if you must borrow from a friend or family member, ask as little as possible, go in with a payment plan, and then make it a priority to pay back.”
Get it in writing
It might be uncomfortable to write out a contract with a friend or family member, but there’s a reason so many financial transactions require them. Jeff Campbell, of shared a personal experience of his own to emphasize the importance of written contracts:
“I lent my father a very large sum of money 10 years ago after he filed bankruptcy and had nowhere else to turn and had to go through the process of realizing he would never pay me back and how that impacted our relationship. The key in entering any business arrangement with family or friends is to be crystal clear and transparent about everything.
“Putting the agreement in writing really helps; that way there’s no gray area and no surprises. It’s even better if the person lending the money looks at it more as a gift than a loan. When you have no expectations of getting repaid then there’s no disappointment when the family member or friend falls short of their agreement.
“Ultimately I had to look at my own loan to my father as a gift. If I hadn’t, I would have forever been resentful of his failure to repay it and it would have tainted my final years with him. In the end, I’d rather have those years than those dollars. Inevitably business agreements and partnerships fail because one person has a different expectation than the other and instead of discussing, it one just expects the other to do what they would do in that situation.
More tips for borrowing money from family and friends
“1. Protect the personal relationship by creating a clear and fair repayment plan up front. Put it in writing and stick to it. Whether a legal document is created or not, your personal relationship depends on the borrower taking this transaction seriously.
“2. Insist on paying interest at a rate of at least what your friend or family member would earn if he or she put the money in a high yield savings account. The truth is, with bank rates as low as they are these days (1-2 percent), by asking for a loan and offering to pay 4-5 percent interest, you could be doing your family member a favor.
“3. Create a schedule for tracking payments on the loan and share it with your friend or family member. Knowing when to expect your payments and when the loan will be repaid in full should ease any anxiety your personal lender may have. You show your gratitude for the favor of the loan by making repayment as transparent and stress-free for them as possible.”
Looking for a good sample contract? Well, we’ve actually written one for you! Check it out below. Hopefully, you’ll never need it, but better to have it and not need it than to need it and end up broke.
The money was borrowed for the purpose of __________________ and will be repaid, in full, Reason for loan by ________________.