On the surface, family loans seem to benefit all parties involved, but they come with some significant risks. Here are some key things to keep in mind if you want to borrow from (or lend to) your family members.
Consider other options first
While borrowing from friends or family may seem like the ‘cheaper, easier’ option, there can also be a lot of negatives (we’ll come to these in a second). So what could be an alternative?
If you want to avoid difficult and embarrassing situations, applying for a personal loan can often be a better option. A lender will work with you to ensure the repayments are affordable and fit within your budget. There could even be tax benefits if you are self-employed (depending, of course, on the purpose of the loan).
Plus, if you decide to ask a family member first, they may even ask if you have considered other options; go into the conversation with details of your efforts to get the money in other ways.
Protect your relationship
It’s important to protect your family relationship or friendship. Make sure everyone is on the same page at all times; be clear and honest about why you need the money, and why you would prefer to borrow the money from a family member or friend.
One of the benefits of using a third-party lender is that your reasons for borrowing are between you and the lender; you don’t need to justify your reasons for borrowing money (as the purpose just needs to be valid and legal, and within the lender’s criteria).
Prepare for a no
Your family member may say no, but remember, it’s not personal. People have all sorts of reasons for not wanting to lend money. Perhaps they just have a rule that they don’t lend to family, or maybe they need the money for something else.
Either way, make sure you have a Plan B. If you are relying on family, and they say no, get in touch with Motor Vehicle Finance; we can help you apply for finance with a lender.
Is the loan straining anyone’s finances or future?
Before accepting a loan (no matter how big or small), make sure you know that it is not impacting on your family members needs. If you think that it may put them in hardship, or impact their needs in any way, consider going to a third-party lender instead.
Your family’s relationship and financial well-being always need to come first.
Agree on clear terms and put them in writing
Even if it is a family loan, it’s a good idea to have a formal agreement in place.
Make sure you and the person you are borrowing from agree on the terms of the loan, and expectations. Set out what the expected repayment schedule is, and any interest or other charges that may apply.
And don’t forget to include what will happen if you don’t meet your repayment obligations – including the obligations of any other party to the loan (your partner, for example). Getting the loan documented clearly can stop future stress, if the borrower and the lender are on the same page.
Here’s the bottom line
Is borrowing from your family the right choice for you? Make sure you consider all the pros and cons, including any emotional or financial risks. In some cases, borrowing from a lender may be a better solution, because it’s generally better to leave family and friends out of your finances, if possible.
Using a third-party lender can help you meet your financial needs and protect your close relationships, without money getting in the way. If you’d like to talk about a personal loan for you, please don’t hesitate to contact our team at Motor Vehicle Finance on 0800 666 021 – we’re here to help, and we’re not just about car finance!