At some period in our lives, most people find themselves in tight financial circumstances that cause them to consider borrowing money from family to tide them over. Often, this happens when the individual is faced with unforeseen situations such as the loss of a job, unexpected healthcare costs, or a broken-down vehicle. Holidays are often when people feeling the pinch will turn to loved ones for support in covering the seasonal expenses.
When approached sensibly, borrowing money from family can prove to be a viable and straightforward option. However, there are times when this arrangement can end up serving neither party well and can even lead to strained or severed relationships.
In this article, we’ll weigh the pros and cons of approaching family members for financial support.
There are several obvious benefits to turning to a family member for a loan. These include:
One of the biggest upsides to borrowing money from family members is that you’re likely able to negotiate more flexible payment options and repayment arrangements.
This is in stark contrast to what happens when you take out a loan from a financial institution or seek a payday loan. These providers often demand security for the loan and mandate specific, regular repayments. If you default on these, you’ll be charged extra fees for late payment. Worse still, they could take legal action against you and dent your credit record.
If you approach a bank or other short-term lender for money – or take on credit card debt to fund your expenses – you’re inevitably committing yourself to high-interest rates. Of course, these lenders are in the business of making money, so it’s not unexpected. Still, some attach exorbitant interest rates to their loans, making repaying and finally settling the debt an uphill and protracted battle for many borrowers.
When you borrow money from a family member, they might waive any interest charges on their loan or at least be prepared to settle for a lower, more reasonable rate.
Just as your family member might be more accommodating than a financial institution or payday lender about the interest they attach to your loan, there’s also a good chance that they’ll be more flexible about the loan repayment period.
It’s a good idea to be transparent and honest with the family member who has given you your loan if you find yourself in a situation where you cannot repay the amount owing at the pre-agreed time. Avoiding them or ignoring their calls will only breed resentment and could end up damaging the relationship irreparably.
For most people, borrowing money from a family member isn’t something they enjoy doing. Often, it’s accompanied by feelings of failure and shame. That being said, letting your guard down and allowing yourself to be vulnerable in front of a loved one is often an indirect way of deepening the bond of affection and respect between you.
Most people feel good about helping out someone who’s in trouble, especially if it’s their next of kin.
If you’re considering going down this route, make sure you’ve considered all the potential downsides, which could include:
The informal nature of loans between family members means they don’t involve the reams of paperwork usually associated with loans from banks and other institutions. This can cause a lack of clarity about the terms and result in misaligned expectations between the two parties.
Additionally, the loan might introduce tax issues for the lender, which can cause stress and an additional financial and administrative burden.
Someone who has lent a family member money doesn’t want to remind the borrower about the debt and ask when they can expect to receive the next repayment. If you’ve borrowed money from a member of your family, go out of your way to keep the channels of communication open with this individual.
It’s not fair to make them feel awkward about breaching the subject with you. If you shut them out or change the subject, it could lead to feelings of anger and resentment on their part.
Not everyone who agrees to lend money to a family member is necessarily happy about it. Some people may feel duty-bound or compelled to do it, especially if the borrower has young children to support or is about to have their home foreclosed on, for example.
Others may agree to front the loan but put themselves in a precarious situation of their own by parting with the cash. These scenarios do not bode well for either party and could result in a breakdown of previously happy relationships.
If you’ve weighed up these pros and cons and have decided that asking a family member or even a friend for a loan, here are some tips to ensure that you go about it correctly and courteously:
With some thought, mutual respect, and sensitivity, it’s entirely possible for family members to loan one another money from time to time without it fracturing the relationship.
If you’re finding yourself in a tight financial spot, consider asking your employer about Payactiv’s Earned Wage Access services and financial wellness tools. Instead of asking your friends and family for money, you could access your own earned wages between paychecks to pay for unexpected emergencies. Access to on-demand pay and a financial management app with saving and budgeting tools, discounts, and free financial counseling can go a long way to putting you on the path to financial freedom.
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