Protecting your relationship when borrowing money from friends or family
The Bank of Mum and Dad is one of the country’s top five lenders. And right now, it’s the kind of finance option many of us might be looking at.
Thanks to the coronavirus pandemic, Aussies are doing it tough, so it’s understandable a loan from loved ones might be necessary — whether that’s our parents, siblings or friends.
Like with any loan, there are risks. In this case, the biggest one is burning the relationship.
“The biggest fallout isn’t the financial, it’s the emotional,” says Sunshine Coast lawyer Samantha Bolton.
But if you do it right, it can be a transaction that gets you through a tricky time, relationship intact.
We spoke to three experts and a young woman who has successfully borrowed money from a friend for their advice.
Work out the details
When borrowing money from someone you know, it’s important to agree to the parameters of the loan, says Ms Bolton.
“You need to have those conversations, similar to if you were going to borrow from a bank,” she says.
“What are the expectations of repayments, how is the loan going to be repaid, in what time frame, is interest payable?
“Do you have a backup plan if you fall behind on repayments?”
She says it’s very common for people to fall into a trap of “just pay it back whenever you can”, but that can create problems down the line.
Valerie Fuentes, 36, has borrowed $5,000 twice from a best friend to help her secure a place to live.
Valerie (right) with her best friend who loaned her money
Valerie (right) with her best friend, who has loaned her money twice.(Supplied)
“In order to get a new place here in Miami [Florida] you must pay three months of rent which is a huge chunk of money,” she says.
Valerie says borrowing from a friend rather than a bank gave her more motivation to pay it back.
“I have zero motivation to pay somebody I don’t care about.
“I always provided an expected time of return and kept my word. Both times I paid her within three months.”
Write it down
A verbal agreement has legal standing but writing things down means a dispute is less likely, says Ms Bolton.
She recommends documenting the arrangement, even if it’s just something you’ve written up at home.
“That piece of paper could save your relationship with that person.
“Imagine if you have a loan term and it’s 10 years, and all of a sudden someone raises an issue. It can be hard to remember what conversation you had.”
Ms Bolton says both parties should sign the document and have a copy each.
Financial advisor Melissa Browne agrees, saying a paper trail of any kind is better than nothing.
“Even for $500 I would flick an email, just confirming how long the loan is for, this is how repayments will work, and backup if it can’t be paid on time.”