The Ethics of Borrowing Money from Family and Friends

No one wants to be in a situation where they are dependent on family and friends for their necessities and financial emergencies. But sometimes, we find ourselves in situations where we cannot help even ourselves. If you have somehow been impacted because of work furloughs and business closures in the past year, things might be extra hard on you and your family financially.

While you can rely on credit cards, you know that this is a bad strategy if you don’t want to drown in debt. You can take on a second mortgage on your house, but you aren’t sure if you have enough money to cover the repayments. You are in a rut in short, and the only way out of it is two apply for personal credit and borrow money from friends and family.

But hold on a minute, what if you’ve also exhausted the personal-loan option? What if you already have an existing loan and the banks don’t want to approve your second loan anymore? What happens then? The only way you can get out of this predicament is to borrow money from family and friends. Now, this is always a tricky situation to be in because when money is involved, it usually affects relationships. It also builds resentment and guilt.

There is a right way to go down this route, however. You don’t have to turn to loan sharks when you’re really pressed for money. If you need help, you should be guided by the following rules on borrowing money from family and friends:

Talk About Why You Need Money

It’s important to be honest with your family and friends about why you need money. Do you need it for your kid’s tuition? Do you need it to pay off all your debts? What are you planning to do with the money? When you borrow money from a bank, you fill out an application and explain where you’re going to use the money. Do the same with your family and friends. Explain to them your financial situation, so they know what they are getting into.

They have to understand why you need funds, as well as the seriousness of that need. Include details such as how you’re going to repay the loan, where you’re going to get the money, how long the term is going to be, and how much interest you can afford to pay.

Set up Repayment Terms

When you say you’re going to repay them when you can, it shows that you are not serious about when you can repay the loan. No one will want to let you borrow money then. Do you know that three-quarters of people who borrow money from friends and family are not able to repay the loan in full? That is why your family and friends might not be jumping up and down about the idea of lending you money.

Break down how you are going to pay the loan. Make a schedule so that your family and friends understand when they can expect their money back. This will show them how serious you are about repaying the loan. Talk about how you plan to repay the loan—where you will get the money and whether you will pay them every month or every quarter. If possible, give them a rundown of your household budget, so they know your repayment schedule is possible.

Family and friends might now feel comfortable about imposing an interest rate. However, this shows seriousness on your side. If they don’t want to, then you can take comfort in that but make sure to pay the full amount earlier than scheduled.

Have a Backup Plan

There is always a possibility that you might not be able to repay the loan in time. Have a plan ready just in case. If you miss a payment, are you going to pay a fine? What does the lender want to happen if you are late with your repayments? Offer to pay a late fee so that they can see how serious you are about repaying the loan on time. Make sure that the late fees will increase the more behind you are in payments.

All the details you discussed should be written down in an agreement. Others might feel uncomfortable about signing an agreement with a friend or family. However, this is for you and the other party’s protection. With an agreement in place, there are legal procedures that will be followed if one or both parties reneged on the loan.