How to Borrow Money From Family & Friends Without Straining the Relationship
Americans borrow a whopping $89 billion from family and friends every year, the Federal Reserve Board Survey of Consumer Finances estimates. Eight-two percent of Americans are willing to lend to family members, 66 percent are willing to help out friends, and 92 percent of young Americans—more than any other age group—are open to lending to family members. Perhaps older Americans are more reluctant to loan money after experiencing some of the problems that can come with it, such as not getting paid back, strained relationships and lost friendships. If you plan on borrowing money from a family member or close friend, follow these best practices to avoid complications.
In his book “Influence: The Psychology of Persuasion,” persuasion psychology expert Robert B. Cialdini cites research that indicates people feel obliged to return favors, a principle called reciprocity. If you expect to count on others when you need help, set the example by being generous when they need your assistance. You don’t necessarily need to have money to be generous, but you can contribute your time and support in other ways.
Explore Other Options First
Because borrowing money from family and friends runs the risk of straining relationships, carefully weigh the pros and cons of doing so. Consider these other methods of raising funds:
- Make a budget and save
- Get a credit card cash advance
- If you receive regular payments from a structured settlement or annuity, sell them to a company such as J.G. Wentworth for a lump sum. Before you do so, though, you should ask yourself these questions.
- If you’re borrowing money to start up a commercial enterprise, apply for a small business loan
Document Your Agreement
If you decide to ask family or friends for a loan, the best way to prevent personal problems is to treat the loan like a business agreement. Document the loans in writing, including how much is owed and when it will be repaid.
Pay on Schedule
The Small Business Administration also advises setting up a payment schedule, even if you enjoy a close personal relationship with your lender. This will help you budget your loan repayment and prevent any problems that might arise from disputes over late payments.
If you were borrowing from a commercial source, you would have to pay interest. Family and friends may be willing to extend you no-interest loans, but experts advise offering at least as much interest as they would earn from putting the same amount in a high-yield savings account, or no less than 2 percent. This is not only a gesture of appreciation, but it may also have tax implications. If you don’t pay interest, the government may assess a gift tax. If the loan is over $100,000, the IRS will tax your lender for interest whether you are paying it or not, according to Entrepreneur.