The Bank of Mom & Dad: Rules for Borrowing Money From Family or Friends

bank of mom and dad

Maybe you need a new car or the down payment on a house, or you’re just drowning in debt. No matter what the funds are for, borrowing money from friends or family is nothing that should be taken lightly. As much as you love your parents and they love you, borrowing money can have a tremendous impact on the dynamics of any relationship. If you do decide this is the avenue you want to take, follow these rules:

Get Educated

Before approaching a family member or friend about borrowing money, find out the current interest rate you would be charged if you took out a loan from the bank. Also learn the interest rate the would-be lender would be earning on the funds if he or she were not lending it to you. You can find that information on a website such as BankRate.com. A win-win situation would be to decide on an interest rate somewhere in between.

No Negotiating

If you’ve been denied funds everywhere else and a friend or family member offers to loan you money, you do not have the power to negotiate. Asking for a lower interest rate or better terms is the equivalent of looking a gift horse in the mouth. If the offer is not an agreeable one, do not try to negotiate. Smile and say thanks or no thanks.

Exhaust Alternatives

Before considering this type of loan, examine your spending habits with a fine-tooth comb:

  • Will that loan payment fit into your current budget? If the answer is yes, ask yourself why you haven’t been saving that money in the first place.
  • Do you receive regular structured settlement payments? Companies such as J.G. Wentworth may be able to purchase your future payments for a lump sum of cash now, and you might not have to borrow from friends or family.
  • Instead of taking the loan now, commit to saving the repayment amount every month for a short time period. If you follow through on your commitment to pay yourself, reconsider your need for a loan.

Document Terms

If the loan is a “go,” write down the agreement. Consider using a promissory note template to document the terms of the agreement. Be sure to include the penalties you will face should you default on the loan. Both parties must agree that the written terms document the spirit of the agreement.

Pay on Time

Better yet, pay off the loan early. Doing so shows dedication to the cause, responsibility for your actions and gratitude to the lender. Mind you, they have loaned you something that is precious to them. Your relationship may be strained until you do. Once you pay off the loan, write a heartfelt letter of appreciation to your lender. Your relationship will blossom for doing so.

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