I have borrowed (and lent) money to family members and have lived to tell the tale. But make no mistake, this common activity is also a dangerous activity that can wreak havoc in personal relationships.
The National Foundation for Credit Counseling’s 2016 Consumer Financial Literacy Survey found that nearly 25% all American’s turn to their family and friends as the first source to help with ongoing financial needs. They found that the average amount borrowed was $8,546 with most people not charging any interest. Between parents, mom is a more popular target than dad. The bad news is that only half of the loans are fully paid back and 14% are not paid back at all.
The biggest reason people borrow money is to start a company. In the three businesses I’ve started, I have taken money from family and friends with mixed results. When the company was successful, they bragged about their insight into my talent. When the company lost their money, they personally blamed me, and in some cases, it damaged our relationship.
On the other side of the ledger, I have invested in many “ground-floor” opportunities from my family and friends that mostly went bust. While I do not hold it against them, I still carry the disappointing results with me when I see them.
Ask these questions before borrowing money from friends and family:
- Will they have a say the money is used? Once someone gives you money, they might want to monitor how it is being used (or comment on how you spend all your money!). Remember that getting money from family always comes with strings attached.
- What is the actual plan to pay them back? This should be documented in a short agreement that shows the amount borrowed, the interest rate and dates payments will be made. Indicate what the penalties are for being late.
- Can they afford to lose it? If not, do not borrow it. Any personal loans are risky and you don’t want to take money that a person needs to support themselves. Always think about how this will affect your relationship with the lender if you lose their money.
Tell me about your experiences on borrowing or lending money to a family member or friend.
