Money and Relationships: Exploring the Dynamics of Borrowing from Loved Ones

In Indian tradition, seeking financial assistance or borrowing money from friends and family is quite common. Many individuals believe that borrowing money from loved ones is socially acceptable, with the understanding that they will promptly repay the amount borrowed. Furthermore, this method is often preferred due to its convenience and simplicity, as it avoids the complexities associated with getting a loan from a financial institution. Nevertheless, it is crucial to recognise that money has the potential to either strengthen or strain relationships. This article delves into the intricacies of borrowing from loved ones, examining the dynamics involved.

What are the benefits of borrowing money from your loved ones?

1. Affordability:

Borrowing money from friends and family often presents a more cost-effective option compared to credit cards, where the average interest rate hovers around 20%, or personal loans, with an average rate of 15%. This approach typically offers lower interest rates or even interest-free terms.

2. Ease:

Borrowing money from loved ones is simplified as it eliminates the need for extensive paperwork or lengthy credit checks. Consequently, accessing the necessary funds becomes quicker and more straightforward. Furthermore, individuals with limited or poor credit histories can still secure affordable rates.

3. Flexibility:

Unlike traditional loans and credit products that come with rigid repayment terms, borrowing from loved ones allows for greater flexibility. The terms can be negotiated and tailored to suit the borrower's specific circumstances and capabilities.

4. Understanding:

When facing challenges in making repayments, friends and family are generally more empathetic and accommodating compared to commercial lenders. In contrast, commercial lenders may resort to legal action if payment schedules are not adhered to.

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What are the drawbacks of borrowing money from your loved ones?

Like any investment or borrowing, loan agreements among friends and family are not exempt from their disadvantages and risks.

1. Absence of Clear Loan Terms:

When you borrow money from your loved ones, there is no formal contract in place, resulting in unclear terms and conditions for the loan. This ambiguity can become problematic, especially if you struggle with financial discipline, as it increases the likelihood of delaying the agreed-upon repayment date.

On the other hand, borrowing from a bank or NBFC involves a legally binding agreement between the lender and yourself. This loan agreement encompasses all the loan approval and repayment details, providing clarity and structure. In such cases, if you fail to fulfil your obligations, the lender has the option to take legal action. Because you are aware of the fixed monthly instalment and the specific due date for repayment, you take necessary precautions to ensure you do not default on the loan. The presence of a legal agreement acts as a reminder and motivates you to fulfil your financial commitments promptly.

2. No Formal Repayment Tenure:

When borrowing money from friends or family, people typically do not have a specified repayment tenure or a fixed repayment date, but there is an underlying expectation that the money will be returned promptly. However, this can create pressure and awkwardness in your interactions during family gatherings and meetings until the entire amount is repaid.

Nevertheless, borrowing from financial institutions provides you with an extended repayment period, allowing you sufficient time to repay the loan. This longer loan tenure makes the Equated Monthly Instalment (EMIs) more manageable and affordable.

3. Can Affect the Relationships:

Borrowing money from your loved ones can strain your relationship with them. Moreover, encountering them at family gatherings or social events can lead to awkwardness, especially if you are unable to repay the borrowed funds as promised. Since most people do not establish a formal agreement when borrowing from friends or family, there can be misunderstandings regarding the loan terms, further affecting the relationship. Failure to repay the debt on time may even escalate into disputes, souring your relationships.

On the other hand, when obtaining a personal loan from a financial institution, any delay in repayment would result in the lender charging late payment fees, but it would not have a direct impact on your personal relationships. However, if you have availed the loan with the assistance of a guarantor, it can potentially affect your relationship with them.

4. Interest Rate:

Your friends and family may not expect any interest when they lend you money. However, in today's competitive landscape, there are hundreds of banks and NBFCs that provide numerous types of loans. Therefore, by conducting thorough research and comparing various lenders, you can avail of a loan at a favourable interest rate.

5. Cannot Avail of a Top-up Loan:

Once you have consistently made timely payments for a specific number of EMIs, the lender may provide you with a top-up loan on your existing loan. This additional amount can be beneficial when you are already managing high EMIs and need urgent funds but do not qualify for a new loan. Top-up loans often come with attractive interest rates and require minimal documentation since they are based on your repayment history.

However, if you have borrowed money from your loved ones, seeking more funds would not be advisable until you repay the existing dues. You should prioritise and fulfil your financial obligations before considering further borrowing.

What should you do if you have no choice but to borrow from your loved ones?

Opting for a loan from a reputable financial institution is a much more favourable choice compared to borrowing from friends and family. When in urgent need of funds, you have the option to leverage pre-approved personal loans provided by various banks and NBFCs at attractive interest rates. These loans can be obtained with minimal documentation. Once applied, the loan amount can be credited to your bank account within a timeframe of 10 minutes to 24 hours, depending on the lender's terms and conditions. In the absence of a pre-approved offer, you can still apply for a regular personal loan, which typically gets disbursed within 24 hours to 7 days, depending on the lender's loan approval process.

However, in case, due to any reason, you are unable to get the loan from a reputed financial institution at your favourable terms and need to borrow money from your loved ones, you should make sure you follow these tips:

1. Create a financial plan before you borrow from your loved ones. Determine the exact amount you need to borrow and assess how much you can repay, considering your future income and expenses. Be honest and develop a reasonable repayment plan by setting clear goals for meeting your obligations, just as you would with a regular loan.

2. It is advisable to document your calculations and take notes. This will instil confidence in the person you are seeking the loan from, as you can provide concrete evidence that you have considered your repayment capacity.

3. Before any funds are exchanged, it is crucial to establish the terms and conditions of the loan. Clarify whether the money being borrowed is a gift or a loan, as they carry different implications. Gifts do not require repayment, while loans necessitate regular repayments. Both gifts and loans may have tax considerations that should be taken into account.

4. Consider the following checklist:

- Determine the loan amount

- Decide if interest will be charged or not

- Establish a repayment schedule

- Discuss the actions to be taken if you encounter difficulties in repaying the loan or miss payments

5. To ensure clarity and mutual understanding, it is prudent to create a loan agreement template or contract once the key elements of the agreement have been established. This document outlines the expectations and responsibilities of both parties. After drafting the agreement and ensuring everyone involved is satisfied with the terms, both parties should sign the document. While modifications to the original contract can be made in the future, it is necessary to update the loan agreement accordingly. It is also advisable to keep records of all payments made.

6. Once the loan agreement is in place, it is essential to uphold the agreed-upon terms. Make your repayments on time by setting reminders and sticking to your budget. Strive to maintain healthy relationships and ensure the loan does not negatively impact your personal connections.

The Final Perspective:

The dynamics of borrowing money from loved ones have both advantages and disadvantages. While borrowing from friends and family can offer affordability, ease, and flexibility compared to regular lending options, it can also strain relationships and create awkwardness, especially when repayment becomes challenging. The absence of formal agreements and loan terms can lead to misunderstandings and conflicts that may bitter otherwise close bonds. On the other hand, borrowing from financial institutions provides legal protection and avoids personal relationship complexities. Understanding the intricacies involved in borrowing from loved ones is crucial for maintaining healthy relationships and ensuring financial obligations are met responsibly. Henceforth, balancing financial needs and preserving personal connections is key when navigating the delicate intersection of money and relationships.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.