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Borrowing Money from Friends and Family: A Guide

1. Consider Your Relationship

When facing a financial setback, borrowing money from friends or family can be a viable option. However, it’s crucial to consider the relationship dynamics. Avoid asking those on a fixed income, like retired parents or grandparents, as it may strain their finances. Also, think twice before approaching someone you’ve borrowed from in the past if it led to awkwardness.

Borrowing from a loved one can be positive if they have extra cash and can earn interest. Assess the relationship to determine if it’s a good idea. If it is, this could help you avoid a financial emergency.

2. Create a Loan Agreement

A handshake deal can leave both parties vulnerable. Creating a simple loan agreement is essential, even with family or friends. This document can make the lender feel more comfortable and includes:

• The amount borrowed: The total amount to be repaid.
• Interest charges: If applicable, the interest rate should be specified.
• Repayment schedule: Details on when and how much to repay.
• Usage of funds: Clarifying how the money will be used.
• Consequences of non-payment: What happens if you miss a payment or default.

3. Repay the Loan as Promised

Once the terms are set, it’s your responsibility to make timely payments. Add the loan payment to your budget to avoid missed payments. Depending on your agreement, you might:

• Set up automatic monthly transfers.
• Use payment apps like Venmo or PayPal.
• Write checks or pay in cash.

If you struggle to make a payment, communicate with the lender before falling behind. They may be willing to adjust the terms, helping to maintain the relationship.

Pros and Cons of Borrowing Money from Friends and Family

Pros

• Low or no interest rates.
• No credit check required.
• Quick access to funds.

Cons

• Potential strain on the relationship.
• Payments won’t improve your credit score.
• Financing isn’t guaranteed.

Do I Have to Pay Taxes on Money Borrowed from a Friend or Family Member?

Personal loans generally aren’t taxable, but the lender might face gift taxes if they don’t charge interest or if you fail to repay the loan. In 2024, donors can give up to $18,000 without paying a gift tax.

Alternatives to Borrowing from Family and Friends

If borrowing from loved ones isn’t an option, consider:

• Personal loans from traditional lenders.
• Intro 0% APR credit cards.
• Home equity loans or lines of credit.
• 401(k) loans, keeping in mind the potential loss of earnings.

Building a strong emergency fund can help you avoid borrowing. Aim for three to six months’ worth of expenses in a liquid savings account.

The Bottom Line

Borrowing from friends or family can be awkward but may be your best option. It can also benefit the lender if they charge interest. Drafting a loan agreement and making timely payments can help maintain the relationship.

If you need additional funding, a strong credit score can help you qualify for the best rates. For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey.

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