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The Pros and Cons Of Loans from Family/Friends

12 Jan 2018

If you need some money quickly, then as an alternative to making a formal application to a lender, you could ask a friend or a family member if they can help. However, there are both advantages and disadvantages to doing so.

The Pros and Cons Of Loans from Family/Friends
Advantages of borrowing from family and friends

  • It may be easier to obtain the loan. Especially if you have a poor credit history, you may have your loan applications to banks and specialist lenders rejected
  • Although it’s still desirable to draw up some form of a document when borrowing from family/friends, the amount of paperwork you need to complete may well be less than for an application to a recognised lender.
  • The money may be lent at zero interest, or at a very low-interest rate. In any event, the rate is highly likely to be much less than the amount a commercial lender needs to charge for a short-term loan, or the rate a credit card provider would charge.
  • Whereas a loan from a lending company is likely to have a definite repayment date, a friend or relative may be much more flexible about when it is repaid. They may allow you to stop making repayments for a period if things become especially tight financially, or allow you to extend the repayment term.
  • A loan from family or friends will not show on your credit file, and if you miss any repayments, then, of course, this will also not be made public.

Disadvantages of borrowing from family and friends

Simply by approaching a friend or relative for a loan, you are admitting to them that you are in financial difficulty, and you may have preferred to keep that fact from them. If you then delay repaying the loan, they will know that your financial problems are ongoing.

  • The friend or relative may well want to know what the money is for, so once again you may be forced to disclose information which you would have preferred that they didn’t know.
  • The person may be extremely reluctant to lend but may end up saying yes simply because they would feel uncomfortable seeing you struggling with money worries.
  • If you struggle to repay the loan, the person could get very annoyed with you. You could even end up losing a lifelong friend or seeing your relationship with a relative become permanently strained. While you may have borrowed the money to ease your own financial problems, you could also land your relative/friend in financial trouble of their own by failing to pay back the loan.
  • Whilst a commercial loan has a defined repayment term, there is nothing to stop your friend or relative from suddenly deciding that they want their money back, and demanding repayment sooner than originally planned.

Well-known short-term lender Wonga South Africa has published information on its website regarding what people should consider before lending to their family or friends.

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