Should You Borrow From Family?

by Dual Income No Kids on October 16, 2009 · 0 comments

With banks tightening their lending terms, more and more American are likely to consider turning to family for loans. While this might be the right solution for you, it is good to consider whether or not it makes sense for your situation.

First, can the lender afford to do so? If the answer is no, move on. It doesn’t make any sense to have one family member put themselves out there to support another if it means making their own situation more precarious.

Second, consider existing relations with this family member, or perhaps friend. If you’ve faced any conflicts in the past then adding money to the mix is only likely to make things worse and bring up old issues. At the same time, if you’ve had excellent relations with someone, now is not the time to start, and money can often be a difficult area to navigate.

Next, it must be made absolutely clear what the terms are. Just saying that it will be returned at some point puts everyone in a weak position. Spell it all out and put it in writing.

Keep in mind as well the reduced likelihood of being paid back. 14% of loans default when they are generated by family members, whereas only 3% default with standard consumer loans.

If you’ve both thought it through and it seems to make the most sense for you, then we wish you well in handling the process smoothly.

Readers: We’d love to hear if you have any experience with family loans.

Cheers,

Miel

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