Debt Consolidation by Borrowing from Family or Friends

If you have family members or friends who have money and are willing to lend it to you, this is a great debt consolidation option.

This is a good option if you have bad credit and banks and independent lenders are unwilling to lend to you since family and friends will not consider your credit score.

However, there is a risk of even your closest relatives and friends refusing to lend you money. You should not take offense because they understand the dangers of lending to family and friends. In case you are unable to repay for one reason or the other, they are only left with 2 options:

  • To forgive the debt to preserve their relationship with you
  • Insisting that you repay, which will most likely lead to break down of the relationship

Relatives who refuse to lend you money may be doing so to prevent jeopardizing the relationship. They may feel they are unable to forgive the debt should you be unable to repay.

“Neither a borrower nor a lender be; / For loan oft loses both itself and friend,” said William Shakespeare in Hamlet, circa 1603 Act-I, Scene-III. On this famous phrase, the character Polonius is counseling his son Laertes before he goes to Paris that he should not lend or borrow from friends because he will lose both the friend and the money.

  • There is no application process
  • You will get money immediately
  • You may get a favourable interest rate if any
  • You will not be reported to a credit bureau if you make late repayments
  • Your friends and family are likely to agree to a longer repayment period
  • Relatives and friends already know your circumstances and character and are, therefore, less likely to need a detailed business plan
  • They are inclined to say yes
  • Even if they cannot afford all the money, the little you get will enable you to get more from a bank or an independent lender
  • Most people find borrowing money from relatives and friends to be embarrassing. Borrowing means your friends/relatives will know about your financial difficulties that you may have been trying to keep from them.
  • According to Mark Beyer, a financial advisor with Edward Jones, “I would advise against borrowing from a friend or family member unless you have exhausted all feasible options and/or they are willing to give you an interest-free loan.’’ He argues that just like with a bank, the relationship will be fractured if you fail to repay.
  • Borrowing from friends and relatives often lacks clarity, which means the lender and the borrower often have different expectations.
  • There is also a risk of the money coming from friends and relatives will have strings attached, something that does not happen with money from banks and independent lenders.

Your Responsibility when you Borrow from Friends and Relatives

Come up with a proposal when borrowing money and treat the loan as you would a bank loan if you care about your relationship. The agreement should be in writing and it should include:

  • The amount being borrowed (principal)
  • Applicable interest rates
  • Repayment terms (lump sum or monthly installments)
  • The course of action if you are unable to repay (such as an addition of additional costs to the loan, taking collateral, or modifying the loan terms)

You should accept questions from the lender. This shows the lender you appreciate the risk they are taking. Let the lender go through your budget and to even make proposals. Make the lender comfortable that you are able to pay back the loan.Your friends and family will know how you are spending the money. They are likely to take offense if they see you spending it for such things as making expensive purchases, eating at expensive restaurants, and going on exotic holidays.Use any extra money you come across (such as a tax return) to repay the loan. This good-faith gesture will establish credibility.

Communication is key, even when you are unable to honour your repayment obligations.

Explain how lending you money will benefit the lender. As an example, if you have been borrowing money regularly to make ends meet, you could tell the lender than your financial freedom means you will no longer borrow regularly.

Your lender will be wondering why you are unable to get money from a bank or an independent lender. Be honest and explain the reason why (such as a bad credit score). They will appreciate the honesty.