Think Twice Before Borrowing Money from Family & Friends
A few key reasons why borrowing money from friends and family may not be the best option…
It probably happens to everybody at some point: You’re a little low on cash and you don’t want to get overdraft fees from the bank… again. Perhaps your job is late paying you, you went on a shopping spree when you shouldn’t have, or you just didn’t stick to your budget this month. (And, if you’re saying, “Budget?! What budget?!” keep on reading.) So, instead of opting for the overdraft fees, you decide it would be better to ask a family member or friend for a small loan — just until you get paid.
However, there are several reasons why you should think twice before borrowing money from family and friends. Although it may seem like an easy solution in the moment, the aftermath often isn’t pretty — and having to deal with overdraft fees, for instance, will likely seem less costly, emotionally, in the long run.
Here are a few key reasons not turn to family and friends first if you need some cash.
You May Put Your Personal Relationships At Risk
Relationships of every kind have conflicts from time to time, but when you add money to the mix, it adds another kind of conflict — and one that could have been prevented. “Turning to relatives or friends for money truly puts the personal into personal finance — proceed with caution,” says Katie O’Connor, Director of Content at Credit Karma. “You’re putting your personal relationships at risk, and potentially putting the other person’s finances at risk if you’re unable to pay them back in the future. Also, the other person might also expect you to reciprocate the favor when they need help.”
Ash Exantus, Director of Financial Education and Financial Empowerment Coach at BankMobile, agrees. “When you borrow money from friends or family, it is something that may follow you for the whole time you two have a relationship — they may hold it against you forever,” he says. “It doesn’t matter if it’s a year later, five years later, or 10 years later, if they need something, they may always knock on your door first.”
You May Have A Harder Time Building Your Credit
As you grow more fiscally responsible, it’s important to continue building good credit. However, if you borrow money from family or friends, it doesn’t give you the opportunity to work on building that credit. “Borrowing money from someone you know — who likely won’t charge you interest — might seem like a good deal versus a bank’s potentially stricter terms and higher interest rates,” says O’Connor. “But it’s important to keep in mind that borrowing from a loved one likely won’t help build your credit, as he or she probably can’t report your payments to the credit bureaus.”
You May Turn Borrowing Money Into A Bad Habit OR You May Have To Pay More Later
My grandma used to always say that nothing that’s free is actually free, and this includes interest-“free” loans from your family and friends. “Once you open the door to borrow money from friends and family, it will be hard to close that door,” says Exantus. “In my experience, I’ve seen people take advantage of their friends and family because of a small favor they’ve done in the past. For example, if I borrow $1000 from you because I really needed it, and later you know I have the means, you ask me for $10,000 and justify that it is the same as when you lent me $1000. This cycle continues and can really put a damper on someone’s finances or relationship.”
You May Never Pay Back The Money
Even if you plan to pay back your family member or friend, coming up with the $500 or so you borrowed may be challenging — and get placed on the back burner as far as your financial priorities. “I know if you borrow from friends and family, your intentions will be to pay back the money as soon as you can,” says Exantus. “However, the fact that it is your friend or family may unconsciously lead you to not prioritizing that payment to them.”
He also points out that the consequences of not paying back a bank is that it will affect your credit or you may get assets repossessed. But when it comes to a family or friend situation, it’s different. “The only consequence from borrowing from friends or family is damage to the relationship,” he says. “So, you may feel entitled — and that your friend or family will understand your financial situation if you don’t pay them back. It almost always puts a strain on the relationship long-term.”
Maggie Germano, CEO and founder of Maggie Germano Financial Coaching, also says actually paying back the debt may be difficult. “I don’t know about you, but if I lend someone money, I will probably need them to pay me back within a month or so — I don’t have enough disposable income to miss larger sums of money for long periods of time,” she says. “If you think it’s going to take you months or years to pay back the money you need, you should think twice before borrowing from a loved one.”
If You Really Have To Borrow Money, Make An Agreement — And Stick To It
If you have no one else to turn to and must borrow money from a family member or friend, Germano suggests coming to a compromise. “Ask when your loved one needs the money back and set up an agreement and timeline in writing,” she says. “This will make things clear and official and, hopefully, will prevent any confusion or resentment in the future.”
However, Here’s Why It’s Best To Keep Money Matters Out Of Family And Friend Circles
All in all, when questioning if you should borrow money from family or friends, Germano says to think about the long-term ramifications. “If you or your loved ones already have an uncomfortable relationship with money and struggle to talk about it openly, it might be best to avoid entangling your finances,” she says. “People have a hard time talking about it, and that gets even more awkward if someone owes someone else money. Discomfort around money conversations can cause resentment to build up while neither party is talking about the actual issue at hand.”