Pros and Cons of Borrowing Money from Friends and Family

article by Foster I. author
Sometimes financial troubles take us by surprise, or we just need a little extra cash to make a larger purchase than our monthly budget allows. Most people consider two venues for solving these issues: taking out a personal loan from a lending company, or borrowing money from family or friends.

It takes a bit of time and effort to get approved for a bank loan, so you might be tempted to turn to a family member or friend. Before you do, ask yourself if it’s the best route. Here are some pros and cons to borrowing money from someone you know.

Pros of Borrowing from Someone You Know

There are definite benefits to borrowing money from someone you know rather than a bank. For example:

  • It’s a lot easier: after all, there are no requirements to worry about. Unlike banks, your cousin won’t make you provide pay stubs, and they probably won’t run a credit check.
  • No/low-interest rates: One of the biggest concerns of getting a bank loan is the interest charged on the loan. When dealing with someone you know, often they’ll lend you the money free of charge or for considerably less than a lending company would.

Cons of Borrowing from Someone You Know

On the other hand, acquaintance-borrowing isn’t all smooth sailing. You’ll need to deal with road bumps like:

  • Limited funding: Banks and online loan providers have much deeper pockets than most people you know. When borrowing from your uncle, you just can’t ask for as much money.
  • Awkward!: Most people have a hard time even talking about money. Having to admit to someone you know that you’re having financial difficulties is tantamount to voluntarily ironing your own hand. Now, just imagine having to do all that AND asking if this friend can spot you a few thousand dollars. If you’re like most people, you’re already plugging in the iron.
  • Lack of clearly defined terms: Another issue with borrowing privately rather than with a bank or online personal loan marketplace is the obscurity of terms. When to pay back, how much, how often, to where, and other questions remain unclearly defined, which can lead to very uncomfortable feelings, tensions, and sometimes a deterioration of the friendship altogether.
  • Blurred boundaries: This is a common issue that you’ll see creeping into all areas of your life, both business and pleasure. A bank won’t ask what you’re doing with your unsecured loan. They won’t give you THAT look when you go out for dinner instead of cooking macaroni at home every night until you pay them back. If you’re borrowing money to start a small business or keep an existing enterprise afloat, friends that lend you money might think this gives them a right to comment on or question how you run your business. Total headache.
  • Tax issues: Lending large amounts of money can flag the IRS, inviting audits into financial habits. Even if your friend or family member is squeaky clean, there may be tax implications that they didn’t consider or that they expect you to cover (significantly increasing your overall costs).

A Third Solution

 Bottom line, if at all avoidable, it’s always better to leave family and friends out of financial matters. A more flexible option is to turn to a third-party lender. With more lenient requirements and better rates,  you can avoid the awkwardness and ride out a challenging financial patch.