Guidelines for borrowing money from family

borrowing money from family

‘Never a lender nor borrower be’ goes the adage, but is there truth to it? When borrowing money from family or lending to a relative are there ways of doing so without it ending in tears? All borrowing arrangements, particularly informal ones, need to be undertaken with due consideration and careful thought.

Why Borrow Money from Family?

Borrowing from someone in your family can be a useful means of getting out of a jam in the short-term. It is particularly useful to enable you to avoid the staggering interest rates that you’ll be stung with should you resort to a payday loan.

In general terms, it can be a cheaper way of borrowing as a family member may well be prepared to lend to you interest-free. This is of particular benefit, as you reduce the risk of breeding debt as a result of accumulating interest.

Guidelines for Borrowing Money from Family

  • Set the Budget Accurately: In short, you should do the same sums and calculations when borrowing from family as you would do if you were getting a bank loan. That means taking careful consideration of what repayments you can afford and work backward from there, rather than starting with what you need. This means looking at your monthly outgoings by looking at past statements, and working out what you can afford in repayment terms. It is the failure to repay a family member, according to the agreed terms, which can lie at the root of problems. For example, it would be better to be honest about repaying less per month over a longer period, than being overly optimistic – causing you cash flow problems, and relationship problems, down the line.
  • How Much Do You Need to Borrow? Again, be realistic. Do you need to borrow money, or could you save for what you want? If you do need to borrow money, are you ensuring you get the best bang for your buck? For example, research white goods before purchasing, or get multiple quotes for home
  • Work Out if You Need to Borrow from Family? Interest-free money might seem like an enticing option, but do you need to borrow from family? Knowing you may be leaving someone you love out of pocket might make everyday life difficult. Relationships can become strained and awkward by the added dimension of lending and borrowing. Speak to your mortgage provider, or various banks and building societies, to explore your
  • Communicate: Our single biggest guideline when it comes to either lending or borrowing money is to be open and to communicate well. If, as the borrower, you find yourself struggling to make repayments, don’t keep this hidden from the person you’ve borrowed from. Instead, be honest and open and see if you can come to a new arrangement as soon as
  • Can the Lender Afford it? You may be caught up in your own money conundrums, or you may simply assume your family member has plenty of cash to spare, given their lifestyle. However, they need to consider, and you need to respect if they can afford to lend you the money. Specifically, they should consider whether they can afford to lose the money if repayment falls through. Don’t feel awkward to ask the lender to check their sums first too. It’ll be a lot less awkward in advance.
  • Create a Written Agreement: It’s tempting, as your relationship is informal, to keep formal written agreements out of it. However, a written contract will help to cement for all the need to stick to the agreement and help smooth things down the line if there are any problems. This should also include information about what will happen if you are unable to pay the money back. You also need proof of the borrowing arrangement, should you, unfortunately, die before repayment is complete. This will enable the lender to get their money back from your estate.
  • Take Care: And finally, when borrowing from a family member take great care. Tempting as it may be, borrowing from family is not always the best solution for safeguarding relationships. Make sure your relationship is robust, and you put all of the above safety nets in place so that both you, the lender, and the relationship are protected.

Please note: All information within Your Resource Centre is correct at the time of publication, and we make every effort to keep content accurate. However sometimes information may be out of date. You should not rely on this information when making financial decisions as no financial advice has been given. The information reflects the view of the author and not that of Shepherds Friendly Society.

If you’re not sure what to do when making financial decisions then you should consult a financial adviser, who will likely charge for any advice that is given.

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