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Borrowing money from family and friends can be one of the most effective ways to borrow money – and will often come with very loose terms for repayment and maybe zero percent interest.

It is common to borrow money from people you know when out and about at restaurants or bars, but also for bigger lifestyle purchases or changes, whether it is helping setting up a business, buying a car, paying a medical bill or to help pay off a large sum of debt that you might be struggling with.

If you cannot get a loan for bad credit or feel that using loans is just adding to your debt, it is common to asked loved ones for money – and believe it or not, it is the most common form of borrowing in the world.

But borrowing from loved ones can easily become uncomfortable and there are some important steps to take to avoid conflict and confrontation including:

  • Setting clear repayment terms
  • Managing expectations of repayment
  • Being transparent about the reasons for borrowing
  • Having a contract or formal arrangement in place


Setting clear repayment terms

If you borrow $10 here or $20 there, that is not usually going to require clear repayment terms or even repayment when it is from a parent, sibling or close friend.

But when you are borrowing several hundred or thousands of dollars from a loved one or friend, this should probably come with clear repayment terms. This can sometimes be verbal, saying that you aim to repay them in full by the end of the month or within a certain timeframe.

Does your relative or friend charge you interest for lending them money? This is something that should be discussed. Borrowing amongst family and friends is often interest-free, but if it is a parent teaching their child a lesson, then interest is not uncommon, or if they are a distant friend or family member, this could be a reason to charge interest. However, all friendship and family circles will treat this differently!

A parent or sibling is likely to be more flexible when it comes to the repayment terms, but friendships can be fickle, so having a clear repayment date and mutually agreeing or shaking on this, is a sensible idea.


Managing expectations of repayment

You may find that you are in a difficult position and therefore need cash fast from your friends or family to pay off a more serious debt or pressing medical bill. In which case, you may not have a clear repayment date for them.

However, it is important to manage expectations. If you need a few weeks to get back on your feet, this should be fine amongst family and friends. But go several months without repayment or providing any kind of update or managing expectations is very likely to cause resentment and turn sour.


Being transparent about the reasons for borrowing

Disclosing your reason for borrowing from the other party can be a sensible thing to do. Explaining that you have lost your job, have an important bill or are stuck in debt can help make the situation and process go a bit more smoothly.

You may find that having this stress on your shoulders is a hard thing to walk around with and just telling someone can be helpful – and they will want to help you get back on your feet.

This could make the repayment terms more flexible, since you could explain that you are trying to get a new job and once you are back on your feet, you are ready to repay.

If you are lying about the reasons for borrowing, this could be a difficult task trying to uphold this and it could lead to more difficult social situations.


Having a contract or formal arrangement in place

It is not very common to have a contract or formal agreement when it comes to borrowing money between family and friends. However, it has advantages, making both parties responsible and liable for any terms relating to the loan and the debt.

This should be done delicately, because you are still trying to uphold a family relationship or friendship – but even basic terms explaining the following could be useful:

  • Date of transaction
  • Parties involved
  • Amount borrowed
  • Interest due (if any)
  • Repayment terms
  • Penalties or outcomes of non-repayment.

For small amounts, this may not be necessary, but certainly for borrowing larger amounts of $1,000, $5,000 or more and if the borrower may have a bit of a patchy track record – a contract could professionalize the loan transaction and hold up in court if the lender needed to recover their funds.


What alternatives are there to borrowing from family and friends?

So if you do not want to go down the family or friend route because it could compromise personal relationships, there are some other options below to get access to money quickly, especially if you struggle to get approved for loans from mainstream providers:


Credit unions – Credit unions are not-for-profit organisations that offer loans at very low rates and the penalties are very small if you cannot repay (or sometimes non-existent). You must be a member of the credit union to be eligible and you can find out more here.


Title loans – This allows you to borrow money secured against your car. During the loan term, you are partially handing over the deed to the car to the lender, but you can borrow some pretty high amounts and very low rates. The only note is that if you do not repay your title loan, your car can be repossessed by the lender, so you need to have a very clear repayment goal in mind.


Sell things you don’t need – Through various apps, yard sales or Facebook marketplace, you will be amazed how much money you could get hold of by selling things that you no longer need around the house. From books, clothes, CDs, old toys and anything else that you no longer use, there are a number of people who are looking for these items or interested in buying them. Whether they fetch $5 each, this can really add up and contribute to your debt or emergency expense.


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Ben Sweiry

Ben is a professional writer with a multitude of experience in the financial world. With a particular interest in household income, Ben offers top tips on the best ways to manage your earnings.