How to Ask Friends and Family For Money
Asking your friends and family for money can be a dangerous proposition. Here are some best practices to make sure that it won’t end in tears and anger.
Unless you live in a post-capitalist society, you’re probably going to run into a financial emergency at some point. Hopefully, you have an emergency fund already prepared for something like this, but if not, you may need to borrow money to get through it.
This is especially true if the financial emergency affects your car or your body or anything else that’s vital to your day-to-day life. If your credit is in a good place, you can take out a loan with a relatively low interest rate. If your credit is in a bad place, then your options are more limited.
You might be tempted to take out a payday loan, but we would strongly caution against it. The payment terms are incredibly short, and if you don’t pay back the whole loan plus interest and fees in time, you’ll have to pay to extend the loan. This is a quick path to a cycle of debt that can make everything worse.
Getting an installment loan can be a better option, as you can work out a much more reasonable schedule. You’ll still need to be careful, however. Make sure that the lender wants some kind of proof of income and make sure the payments are amortizing, meaning that each payment covers some of the original principal as well as the interest. Otherwise, you could get scammed.
Ideally, the lender should have an easy-to-access customer service line, so you can work something out if you’re ever worried you can’t make a payment. And of course, if your credit is shot, you’ll have to settle for a bad credit loan or a no credit check loan with less than ideal interest rates.
But there’s one way to take out a loan with zero-to-reasonable interest rates, even if you have terrible credit. It’s called the First Bank of Friends and Family. It can be incredibly uncomfortable asking loved ones for help, but it’s an option worth considering.
To borrow, or not to borrow
Before we get into how you should ask friends or family for help, it’s worth figuring out where that option should rank in your consideration.
There are certainly obvious advantages to borrowing money from friends or family. Depending on how well you get along, you may not need to pay any interest at all. And if you’re relationship is on good terms, they should be more accommodating than a bank or other lender would be. And though you might feel weird asking, if you get taken in by a scammy title loan or payday loan store, you’ll be in a worse financial position should your friend or family ever need help one day.
But some believe that asking friends or family for money should be a last resort option. “First of all, you should avoid asking them at all costs,” financial expert Debbi King (@DebbiKing) told us. “No matter what plan you have in place, there will always be a tenseness in the relationship possibly even after the money is paid back.”
But if you do decide to ask your family or friends for money, you’re going to want to follow some ground rules.
Make sure you have a plan
As King mentioned above, you don’t want there to be any more hurt feelings or tension than is necessary. That’s why she suggests you: “Develop a plan that is beneficial to both parties – one that will help you out without hurting the family member or friend. And then aggressively plan on paying back the money before anything else.”
She even offered a personal example from her own family: “Many years ago, my mom borrowed money from her dad to buy her first car. She was supposed to pay him back a small amount each month until it was paid. She actually paid him off every week and paid him much more than agreed upon. To her, paying my grandfather back was the most important thing right behind housing.
“What she did 50 years ago still works great today. If and only if you must borrow from a friend or family member, ask as little as possible, go in with a payment plan, and then make it a priority to pay back.”
Get it in writing
It might be uncomfortable to write out a contract with a friend or family member, but there’s a reason so many financial transactions require them. Jeff Campbell (@middleclassdad1), of NewMiddleClassDad.com shared a personal experience of his own to emphasize the importance of written contracts:
“I lent my father a very large sum of money 10 years ago after he filed bankruptcy and had nowhere else to turn and had to go through the process of realizing he would never pay me back and how that impacted our relationship. The key in entering any business arrangement with family or friends is to be crystal clear and transparent about everything.
“Putting the agreement in writing really helps; that way there’s no gray area and no surprises. It’s even better if the person lending the money looks at it more as a gift than a loan. When you have no expectations of getting repaid then there’s no disappointment when the family member or friend falls short of their agreement.
“Ultimately I had to look at my own loan to my father as a gift. If I hadn’t, I would have forever been resentful of his failure to repay it and it would have tainted my final years with him. In the end, I’d rather have those years than those dollars. Inevitably business agreements and partnerships fail because one person has a different expectation than the other and instead of discussing, it one just expects the other to do what they would do in that situation.
“At the very least having a specific written agreement eliminates the possibility of confusion or misinterpretation.”
More tips for borrowing money from family and friends
“1. Protect the personal relationship by creating a clear and fair repayment plan up front. Put it in writing and stick to it. Whether a legal document is created or not, your personal relationship depends on the borrower taking this transaction seriously.
“2. Insist on paying interest at a rate of at least what your friend or family member would earn if he or she put the money in a high yield savings account. The truth is, with bank rates as low as they are these days (1-2 percent), by asking for a loan and offering to pay 4-5 percent interest, you could be doing your family member a favor.
“3. Create a schedule for tracking payments on the loan and share it with your friend or family member. Knowing when to expect your payments and when the loan will be repaid in full should ease any anxiety your personal lender may have. You show your gratitude for the favor of the loan by making repayment as transparent and stress-free for them as possible.”
Looking for a good sample contract? Well, we’ve actually written one for you! Check it out below. Hopefully, you’ll never need it, but better to have it and not need it than to need it and end up broke.
Personal Loan Agreement
Date of Loan:
Full Repayment Date:
Terms of Contract:
I, _______________, borrowed $__________on ______________, from __________________.
Print borrower name Loan amount Date of loan Print lender name
The money was borrowed for the purpose of __________________ and will be repaid, in full,
Reason for loan
Full repayment date
The loan will be repaid in: one payment / series of scheduled payments
Circle repayment structure
If repayment will be through a series of scheduled payments:
There will be _________ payments in the amount of $__________made on the following dates:
# of payments Payment amount
|Payment Number||Date Due||Date Paid|
Interest and fees associated with this loan:
|Interest Rate (if applicable)||Fees (if applicable)|
Example: $500 loan with 15% APR and fixed payments repayment
|Payment Number||Monthly Payment||Debt Remaining|
Monthly payments and debt remaining
|Payment Number||Monthly Payment||Debt Remaining|
If for any reason any scheduled payment is late, the following action applies:
If loan is not repaid in full by repayment date, the following will occur:
Lender’s Signature Date
Lender’s Printed Name
Borrower’s Signature Date
Borrower’s Printed Name
Additional Notes/Witnesses Present:
For more information on the best ways to borrow money when you’re in a jam, check out these other posts from the OppLoans Financial Sense Blog:
- 5 Alarming Payday Loan Statistics
- How to Avoid Bad Credit Loan Scams
- Is Guaranteed Approval a Real Thing?
|Jeff Campbell (@middleclassdad1) blogs on all things Personal Finance, Parenting, Relationships & more at MiddleClassDad.com. He is a Dad, Husband, Martial Artist and worked for over 2 decades as a leader for Whole Foods Market.|
|Carla Dearing, a Wall Street veteran, is the CEO of SUM180 (@mysum180), an online financial wellness service designed to be simple and affordable. Carla is also CEO of Vibrant Nation, the leading online community of women 35+, and CEO and Managing Director of IMC, a Louisville, Kentucky-based marketing services agency.|
|Debbi King (@DebbiKing) is a personal finance expert, motivational speaker, and the author of two award-winning books, “The ABC’s of Personal Finance” and “26 Weeks to Wealth and Financial Freedom”. She is also the host of a weekly radio show, “The ABC’s of Personal Finance”. Debbi has been featured in numerous media outlets empowering others to win in the area of money. In addition to her work, she is the founder and President of Lovell Ministries and is happily married with a beautiful 19-year-old daughter, 4 stepchildren and 5 wonderful granddaughters.|