Each week, I will bring you a new guest post in the series “Money Mondays”. Today’s post is from Sara Williams. Sara writes about everything to do with debt and credit ratings at her website, . She recently won the UK Money Blogger of the Year award for 2017.
If you really need money to replace a washing machine or help you get through maternity leave, borrowing from friends or family might seem like an easy option.
However, before you take the plunge, it’s important to tread with caution. It’s not just about money … borrowing may change the dynamic of your relationship, and you may come to regret that. So it’s worth weighing up the pros and cons first.
Advantages of borrowing from family and friends
Helps you avoid high interest rates
Borrowing through more typical means such as bank loans, credit cards or store cards can be very high-interest options. The average interest rate for credit cards, called the APR, was 21.6% in 2016 – with the worst offender charging a whopping 59.9%. If you borrow off friends or family, it’s likely to be interest-free.
No legal documentation or checks
If you’re applying for a loan from a bank, for example, the process can be fairly drawn out. You’ll need to complete an online application form, and if your bank decides to lend you the money following their own checks of your credit history, you’ll need to sign some legal documents. With family, they may ask you a few questions, but there won’t be formal credit checks.
More flexible if you have problems
Although it’s very important that you treat borrowing money from a family member with respect, it’s true that other finance routes are likely to give you no flexibility at all. You may find yourself hit with late fees – or even, in some cases, an early repayment fee if you pay it all back earlier than agreed!
And the disadvantages
You may feel under pressure to repay the money as quickly as possible
If you get a 5 year loan from a bank, then that’s how long you repay it for. And it’s your own business if you want to go on holiday or get a new car during those 5 years. But if you have borrowed from your brother, is he going to be disapproving if you are going on a nice holiday or eating out with friends a lot when you still owe him money?
He might not be, but you may still find the situation awkward and feel you have to repay it sooner than you wanted.
What if your finances get worse?
It’s not nice owing money to banks and credit cards that you can’t afford, but it’s a lot worse if it’s your parents or your best friend. This can lead to a very difficult situation where you find yourself getting very expensive borrowing from payday lenders or logbook loans to try to keep afloat yourself and keep repaying that family loan. This can end in disaster.
What if you are asked to repay the money quickly?
You may find yourself in a very difficult situation if your friend says they need the money back if possible because their own income has dropped. Or their car has to be replaced.
Can they really afford to give you a loan?
However desperate you feel, do think about whether the person you are borrowing from can afford it themselves. You don’t want your mum to be going without, or cutting back on heating.
Alternatives to borrowing from family
It’s worth looking for alternatives that would be really affordable:
- Is there a local credit union?
- Could you get a wage advance from your employer?
- If your only income has been benefits for more than 6 months, ask the Job Centre if you could get a budgeting loan – this would be interest free.
- If you are waiting for benefits, ask if you could get a Short Term Advance until they are paid.
If your money problems are caused because you have too much debt, then getting some more, however cheap, isn’t a good idea. Talk to a debt adviser about your situation and what your real options are. Here that I recommend.
What about a guarantor loan?
A guarantor loan may sound good because your friend or relative doesn’t actually have to give you money. But they are actually really dangerous because the interest rates are so high. This means it’s much more likely that you will get into trouble and then your guarantor gets landed with paying not just what you borrowed but all the extra interest as well. It’s safer to borrow directly!
If help from family is the best option
If you decide you’re going to borrow money off a friend or family member, treat it with the respect it deserves. Make a plan with the other person about how you’re going to pay it back and how long it will take. Ask yourself if those payments are realistic – don’t be over optimistic. Put it in writing and set up a standing order to pay them every month.
If you have a blog yourself and want to take part in this weekly series, get in touch and let me know your ideas.
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