Should I borrow money from family and friends?

Borrowing money from family and friends can seem like an easy way to access some money if you’re in a tight spot. However, borrowing from family and friends does not come without potential complications. If things go wrong and you are unable to pay you could risk hurting the people around you and damaging relationships.

Many people turn to a friend or family member in a time of need and choose to borrow money.  During the pandemic especially, more and more people turn to family and friends for financial support to stay Afloat.

In October 2020 it was estimated that 5.9 million people borrowed from family or friends during the Covid-19 pandemic, according to The Financial Lives Survey, carried out by the Financial Conduct Authority (FCA).

Borrowing from friends and family might give you the money you need to tide you over until the next paycheck or offer support in a financial emergency,  but is it a good idea?

What to consider

There are many things to consider when it comes to choosing to pursue an informal loan from a family member or friend. Is important that you have some understanding of whether your friend or family member can afford to lend you the money you need. 

You don’t want to be the reason that another household is struggling financially. It is also important that you have made a clear plan for how and when you will repay the loan and how difficult this will be for you in your current financial situation.  Knowing these key points will make your decision a lot easier.

What’s the pros?

• Friends and family don’t tend to charge much interest which means you’re lying will be cheap. They may even offer you alone without any interest which means you would only repay the amount you’ve borrowed.
• You don’t need to pass a credit check in order to borrow money from family or friends.
• Not being able to repay the loan won’t negatively affect your credit score.
• You won’t need to resort to an expensive form of credit like a payday loan.
• You may have an increased level of flexibility as you will be able to discuss the terms of your loan with someone who wants to support you. It may be that in a month where you are struggling you can pay back slightly less than agreed.

 What are the cons?

• The biggest issue with borrowing from family or Friends is that if payments are missed or there’s a misunderstanding about the loan agreement it could have a negative impact on your relationship. Think very carefully about the likelihood that you will be able to repay this loan, and what the ramifications would be if you can’t.
• If you’re the one lending as a possibility you won’t be paid back
• As a borrower, you won’t be able to improve your credit history which means if you pay back your loan it won’t help you secure a new loan in the future. 

How do you borrow money from family or friends?

If you’re planning to borrow money from a friend or family member there are a few important things to think about first. Consider the size of the loan you need and draw up a mutually agreed-upon repayment plan. Make sure this plan covers all eventualities. Consider what happens if payments are missed, paid in part or even if somebody dies. Make sure this agreement is written up and both parties have a copy.

 Do I have other options?

Of course you do. There are many options when it comes to borrowing money. Get in contact with your bank to see what loans might be available to you. You can also contact a financial planner to help you make the best financial decision for you. If you don’t have a good history when it comes to borrowing or you have a poor credit score, there are still options, you could look into something like a payday loan to cover those unexpected financial emergencies.