Borrowing money from family and friends is often somewhere you may turn to if you need to borrow money instantly, over a short period of time . You might need a short term cash injection because of an unexpected expense, medical bill or other financial emergency.
If you do not want to go down the path of applying for online payday loans because you are worried about not being able to repay the lender on time or because of the high interest rates then there are alternatives to payday loans.
One of these alternatives is borrowing money from your family and friends. Although this may seem like a good idea and better than payday loans on the surface because they might not charge you any interest and they can be flexible with a repayment schedule, there are also some disadvantages of borrowing from people close to, whether you need a $500 loan or are looking to borrow $1,000 or even more..
Borrowing money for a short or long amount of time from family and friends might however lead to damaged relationships and in some instances it may even lead to tax issues with the IRS, so it is important to be careful when looking to borrow money from any family or friends.
Both the pros and cons of borrowing money from family and friends instead of getting a payday loan are explored in this guide.
Advantages of Borrowing Money From Family and Friends
There is no doubt that there definitely can be some advantages to borrowing money from family and friends if you are in need for a short term cash injection to cover an unexpected cost such as a car repair, emergency loan or a veterinary bill.
Your family and friends will naturally be some of the first people you will speak to about any debt problems or money troubles and so it is only normal and natural that you turn to them to borrow the money you need where you can.
Here are some of the advantages to borrowing money from the people closest to you:
Friends and Family Have More Financial Flexibility
One of the most important reasons it might be better to borrow from family and friends, rather than get a payday loan or other cash advance option is because of the flexibility that they can offer. If you think that you might struggle to repay your loan on time, a lender will charge you interest and late repayment fees and you might even have to go to court for lack of payment.
However, with family and friends, they can be flexible about the situation if you keep them updated on your financial circumstances. This can allow you more time to repay the money that you owe without worrying about any damaging repercussions like ending up in court or having your home repossessed by a payday lender or other financial institution.
It is always important to remember that you should keep your family member aware constantly of when you think you will be able to repay the money so that there are no complications in your relationships.
Your family and friends will also have an emotional interest in seeing you succeed and find your ay back onto your feet. No one wants to see their nearest and dearest in trouble with money or otherwise and so, your close friends and family are often likely to be willing to step in to lend you the money you need at short notice.
They Will Already Understand Your Financial Situation
What is great about borrowing money from people that you know well and are close to is that they will more than likely already understand your situation from numerous perspectives.
They know what your unexpected cost is and when you get paid; they know if you are telling the truth when you tell them you can pay them back at the next payday. Also, friends and family may have in the past turned to you for similar help which you may have helped with and so, returning the favor is something they will likely be happy to do.
Also, if you have a bad credit history it is possible that you are rejected for a payday loan by a normal lender or asked to pay an extremely high interest rate. When friends and family understand your situation they may be more willing to let you off and actually provide the money with little consequence.
Low or No Interest Rates From Your Nearest and Dearest
It is not uncommon for family members or friends to charge low interest rates when borrowing but usually there would be no interest at all on loans taken out from people you are close to. This can help you repay less than you would have to for a payday loan and make sure that you can repay on time.
Payday lenders and other traditional money lenders will always charge you interest on top of the loan amount which can end up being expensive and costing you quite a lot of money, as many Americans have found over the years when borrowing from payday loan stores and other traditional lenders.
Disadvantages of Borrowing Money From Family and Friends
It is important to be aware that there are also disadvantages to borrowing money from family and friends and it is important to try not to break or damage relationships because of financial issues.
In cases where you feel that borrowing any money from family and friends could impact and even damage a relationship, you may need to look at payday loans or alternatives to payday loans if you need to avoid upsetting anyone or causing any relationship difficulties.
Borrowing From Friends and Family Can Damage Relationships
The most important reason that it might not be wise to borrow money from family and friends is that it can have a huge effect on your relationships and can damage them. Money is a sensitive topic and is not something that is easy to address for everyone, even if they are a close friend or family member.
If something was to go wrong with your finances and you can’t repay the money you owe, there may be disagreements over when, how and how much to repay to someone you hold dear and it can even end up damaging close relationships with your closest family and best friends.
Things can get messy and it might not be worth it when there are other alternative routes you can go down especially if you know you can repay in time.
Lack of Clarity
When you are borrowing from a recognized lender you will have to sign a contract and the terms and conditions of the loan agreement will be clear and understandable so that there is no miscommunication and no confusion.
When you borrow money from an established lender, they will need to abide by certain standards and both you and the lender will need to keep to the terms of the loan agreement set by the lender to avoid any confusion. For example, if you apply for an installment loan, there will be clear terms and conditions for the loan, dictating its terms and what the lender and the borrower need to do for everything to go smoothly.
Unfortunately you might find when borrowing from family and friends that there is a lack of clarity as you are unlikely to put a legal document or contract together.
If you have not signed on a legally documented form for a loan covering the terms of the agreement, then there could be disagreements and misunderstandings about when and how much money will be paid back to your friend or family member.
This can lead to further complications down the line such as damaging relationships but also taxation issues, which can then cause more unwanted financial problems. If you are going to borrow from family and friends make sure to set out clear terms and conditions that both parties understand.