Borrowing from people that you know is dicey. There is always the chance that the loan will negatively affect the relationship. For this reason, financial experts strongly recommend treating loans from family and/or friends as “seriously” as those from a bank. If someone agrees to lend you money to repay your debts, draw up a contract and specify the amount and frequency of repayment. Also, be very clear about whether the money is a loan, a gift, or an “advance” on an inheritance. Advantages of borrowing from friends and family are that the interest rate charged will likely be lower than rates previously charged on loans, there won’t be any late fees and penalties, and there is more “flexibility” and understanding about short delays in payment. Key considerations are whether the borrower is capable of repaying the loan, whether the lender can truly afford it, and whether the loan will improve the borrower’s financial situation or simply delay the inevitable (i.e., bankruptcy). We would like your feedback on this Personal Finance Frequently Asked Question.

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