The general rule of thumb for borrowing from friends and family to reduce your debt is – don’t. You’re likely to get a much better deal from them than getting a loan from a bank or other lending institution, but the risk is personal and may mean inviting an eventual rift between the people involved.
One reason you should never borrow from family or friends is that it’s so tempting to use the money for other purposes than paying off your debt. Going through a bank will ensure that you pay them and they will hound you if you don’t.
There’s also personal risk in getting a loan from someone you care about. The relationship could end up in shambles if you don’t act responsibly to pay off the loan and use the money for other purchases so you’re even deeper in debt than when you got the personal loan.
But if you run out of options and getting a loan from friends or family is your only way out, make sure you have a concrete plan for paying them back as soon as possible. That means creating a budget so you know you’ll have the money when the time comes to pay it back.
A friend may balk at you paying interest on the loan, but you should insist. They could deposit the same amount of money in a bank and earn interest from it – so what you would be getting is actually them forfeiting income so they can help you out.
Insist on paying at least the rate of interest they might earn from a high-yield savings account. And if your friend offers less money than you need, don’t keep asking for more. Graciously accept what they’ve offered and move on. Never negotiate a loan with a friend.
Document your loan. Create a payment plan on paper that outlines the amount and date each payment is due. Make sure you provide the lender with a copy so he knows when to expect your payment(s) and when the loan will be repaid in full.
After you both agree to the terms of the loan, stick to the plan. Never be late and don’t come to your friend with excuses about why you’re going to be late or can’t pay the full amount. This is more than a business transaction – this is a personal relationship that could easily turn sour unless you stick to the plan.
If at all possible, pay off the loan early. Even if you think the friend or family member doesn’t need the money right away, make every effort to improve your financial situation and to pay back the loan as soon as possible.
Make sure you pay it forward in your future dealings. The people who have helped you out of a financial jam may need the favor returned – or there may be someone else in your life that is going through much the same financial problems as you. Offer as much as you can to show your appreciation and your attitude and kindness.
Borrowing and lending money between friends and family is a slippery slope. I have a general rule that I never do this. It complicates the relationship. If someone does want to lend money to a friend or family member, I would say, get it all down in writing and all that jazz, but at the end of the day, you should consider that money gone. That way, it’ll be a nice surprise if they do pay you back, and if they don’t, then the relationship isn’t damaged beyond repair.