Times are tight, and often the quickest path to some much needed cash is through a loan from a friend or a family member. Do what you must, just go into such arrangements with your eyes open (and, if you’re a potential loan target, maybe with your wallet closed).
For starters, know what’s at stake when you turn to a familiar face for some quick cash. When you borrow $5,000 from a bank, chances are you won’t have to see your banker across the table from you on Christmas Day, or at the next family reunion. But when you borrow from Uncle Sidney, and haven’t paid him back by the agreed-upon timetable, that family visit may be as pleasant as a root canal.
Worse, if Uncle Sid gets sick and passes away while you still owe the money, you’re no longer dealing with just family – you may be dealing with sharped-fanged lawyers acting on behalf of your uncle’s estate.
So how to balance family and the need for a fast financial boost?
Start by writing a pro and con list. The “good” list might include the benefits of getting your hands on quick cash, the ability to (probably) avoid a high interest rate (or any interest rate at all), and the absence of any negative impact on your credit score if you’re late making payments. On the down side, the list might include the potential awkwardness of regularly seeing, face-to-face, someone you owe money. Or, it might lead to strained family relations if you don’t pay back the debt, or go back on your word by paying it late. Then there’s the likely absence of a written contract, spelling out the terms of the loan, and how and when it will be paid back. Between family members, legal contracts are usually an afterthought. Without a contract, agreements become muddled, and loan payments can even wind up un-enforceable if the terms aren’t clearly spelled out.
For the lender:
- Draft a formal loan agreement and have both parties sign it.
- Spell out, in concrete terms, how and when the loan will be repaid, and whether there is any interest involved.
- Make sure your agreement includes language on what happens if the borrower defaults on the loan.
For the borrower:
- Make every effort to exhaust other options. Cash comes and goes, but family relationships last a lifetime. And bad family relationships triggered by a sour loan lead to lousy family relationships that last a lifetime. Best bet: if a bank won’t lend you the money, go to a credit union. If a credit union says “no”, try one of those peer-to-peer micro-loan Web sites like Prosper.com that connects borrowers with lenders (usually for loans for a few thousand dollars or less).
- Set up a payment plan via Pay Pal. Pay Pal (Stock Quote: EBAY) allows the lender to automatically send requests for regular payments (weekly or monthly, for example). That way there is no awkward meetings at the local doughnut shop, or worse, at the kitchen table, between the borrower and lender.
- In the end, the best protection against having to pursue a family loan is to keep your savings high and your debt low. But if events overwhelm you financially, and you have to borrow from a family member, treat the deal as a business arrangement and make absolutely sure to pay the money back.
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