The most difficult loan to handle is the one from family and friendsWhy we borrow from family and friendsThe dangers in doing themWhy it is important to have to clear communication when lending to or borrowing from family and friendsQuote of the lesson
When I hear stories of people getting out of debt,
the debt that gives them the most trouble is often a loan from a family
member or friend. Giving or receiving loans from relatives or friends
sounds like a good idea, but if you aren’t careful they can easily turn
into a nightmare and easily lead to a ruin relationship.
Now most
of you know I don’t recommend borrowing for anything, but what if you
are already in the position of owing money to friends and family or are
considering loaning money to a relative to help them get through a rough
spot?
Today’s lesson we cover why it can be enticing to take out
loans from family members and friends, discuss the dangers in doing
them, how to handle these loans in the debt snowball, what happens if
you can’t pay back a family member or friend, and a special discussion
about co-signing and student loans.
Giving and receiving loans
from a family member or friend occur often because it is easier to do
then go to a bank or lending institution and go through all the
paperwork and hassle. Perhaps you have bad credit and aren’t able to
qualify for a loan from anywhere else. Or with low saving interest
rates, you can make more by loaning it out to someone and get a better
return than keeping it in a savings account in addition to “helping” out
someone you care about.
However they often don’t work because
since they are family or friends you don’t do the proper documentation
and have a hand shake agreement. But after a few months go by, the “pay
me back whenever” lender gets tired of not having his money back and
seeing the borrower post on Instagram and Facebook about the nice dinner
or vacation they just had. The leads to bitterness and resentment and
at best leads to a strain in the relationship and at worse a total
disolvement of the relationship and leading people to not talk for
years.
In addition giving out a loan might not actually be a help
to the individual, it might actually harm someone. Quite often these
loans are given in a crisis situation due to a job loss or medical event
and are used to not miss a payment on a car or mortgage.
But is
this loan you are giving to them actually going to help their situation?
Or is it just going to perpetuate the problem of poor financial
management? That is something that needs to be considered before lending
out money.
Since they cause a lot of strain on relationship I
recommend treating them a little differently in the debt snowball. If I
can move them up and pay them off sooner I would try. For example if you
owe your in-laws $5,000 and have a $3,000 credit card balance I would
try and pay off the $5,000 first, as long as you can make your own
minimum payments. However if that loan from the in-laws is $20,000 I
wouldn’t move it up the debt snowball.
What happens if you can’t
pay? Well then you need to have clear communication with the lender and
give them your entire financial picture and share why you can’t pay them
at that particular time. Now this might be embarrassing to admit to
them that you can’t pay. But it will help the relationship a lot more to
sit down and be vulnerable instead of telling them “I’m working on it”
and have no plan on how to actually do it.
With that being said I
can’t recommend lending money to or borrowing from family or friends.
The risk of running the relationship is too great.
Today's quote of the lesson is brought to you by A Tale of Two Houses 

“Before borrowing money from a friend, decide which you need most.” ~ American Proverb
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