Should You Borrow From Friends & Family?

You have credit card debt at a high interest rate, but the bank says you don’t qualify for a lower interest debt consolidation loan.  Should you ask your friends or family for a loan?

borrowing money from friends

Borrowing from family and friends can have even more complications than borrowing from a bank, credit union or almost any other source. Whether or not you should, depends on a number of factors:

  1. How desperate is your situation?  If you need money to pay your rent or else you will be evicted tomorrow, a loan from friends or family may be worth considering.  If you need the money because you don’t have control over your spending, or because you’ve maxed out your credit cards, you may be better off dealing with the debts on your own.
  2. Can you pay it back? Borrowing from friends and family is much different than borrowing from a bank. A bank loans you money based on specific repayment terms, with defined interest and penalties if you don’t live up to your end of the bargain. You may borrow the money from friends and family fully intending to pay it back, but if you lose your job or for some other reason you can’t repay the loan, what happens? How will that impact your relationship with your friend or family member? If you can’t repay your friend, do you lose that friend forever?  What’s more important, the cash, or your relationship with your friend?
  3. What are their circumstances? If you borrow $5,000 from your parents and can’t repay them, will that devastate them financially? If it would, don’t borrow from them. The same goes for asking your parents to co-sign a loan. If you think you are going to default and you may seriously affect their lifestyle, then you need to think twice (and so do they).

In most cases you should consider all other options before borrowing from a friend or family member, because you risk damaging your relationship if you can’t pay them back as quickly as anticipated.  Consider your other options.

For example, if you will be late with your rent this month, talk to your landlord.  Perhaps you can make a partial payment now, and catch up on your next paycheque.  The landlord may not be happy, but if they know you have a plan they are more likely to work with you, and you can avoid getting family involved.

A better option is to take a hard look at your budget, cut some expenses, or get a part time job to increase your income so you can deal with your debts yourself. You need a long term solution, not a temporary one. I’ve seen situations where someone borrowed from relatives and close friends, filed for bankruptcy and these friends are now forced to submit a claim as a creditor in their bankruptcy. They feel hurt, betrayed and are often very angry.

If you deal with your debts on your own, you will have learned something for your future, and that is a much safer alternative than risking your relationship with family and friends.

Category: Debt Management |

Feb 6, 2014


About J. Douglas Hoyes

J. Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a Licensed Insolvency Trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada's largest independent personal insolvency firms. As an expert in debt management, Doug has been helping people deal with debt for more than 20 years.

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