How to deal with friends and family loans
Millions of people borrow money from family and friends across the world for reasons ranging from meeting household expenditures to educational and health expenses.
This is because this form of credits is easily accessible and much cheaper. It does not depend on your credit score. And there is very little interest rate involved.
You can't expect such benefits from a traditional lender, which will look at your credit-worthiness and even charge a sizeable amount of interest rate.
Most loans from a friend or a family member are simply repaid, according to personal finance experts. But there are situations when things can go wrong.
And any failure to honour the deadline and repay can cause guilt, resentment, a loss of trust and easily taint a perfectly built-up relationship. There are countless stories where friends and families have split over an unpaid debt, irrespective of the amount.
So, the process of borrowing money should not be done hastily because it can be a recipe for disaster. Before asking a friend and a relative for a loan, consider whether this is your best option and treat the process with care, and do what it takes to keep both the cash flow and relationship in a good shape.
If your back is against the wall and a loan from a beloved one is the most responsible way to get out of a bad financial situation, borrowing money might be your best option. And make sure you do it the right way.
MAKE A PITCH AS TO WHY YOU NEED MONEY
Before asking for a loan, you provide your friend or relative with a clear idea about your intention for the money such that he or she can understand you have a sufficient rationality for the fund.
BE HONEST ABOUT YOUR FINANCIAL SITUATION
Don't paint a rosy picture of your financial condition. Explain all the risks involved honestly so the prospective lender fully understands what he is getting into from the outset.
Being transparent will also create room for him to be honest and give you genuine advice.
BE REALISTIC
You will be realistic about the amount you need to borrow and your ability to repay. You must project a repayment schedule and timeframe so that the lender can be ensured to get his money back.
Set up clear repayment terms
Set up a clear repayment term because study shows that nearly three quarters of people who borrow money from friends or family members never pay the loan back in full.
Breaking down exactly how you'll pay the loan back will drastically increase their confidence in both your ability and willingness to make payments, according to a Forbes article.
Put it on paper
Put your loan on paper and document the loan terms, principal, and repayment frequency. This helps minimise the risk of a misunderstanding and ensures when the lender can expect repayments.
Pay up on time
Once you agree on the loan repayment terms, be professional and stick to them. Pay your loan on time without making excuses. This is important because a personal relationship that has taken years or months to build is at stake.
If your financial situation improves before the repayment period expires, pay off the loan early.
Maintain communication
If you are struggling with your repayments, don't run or start hiding from your lender. Maintain communication throughout the life of the loan and be honest and sincere about your situation.
"It is important to show commitment when you borrow. Because of the commitment, I was never refused any loan by a friend or relative," says Tuhin Hasan, who works in a private company.