Borrowing Tips

Borrowing from someone you know is vastly different to borrowing from a bank, credit card company or other commercial lender. The relationship is the centre of the transaction. 

To make the loan a success, financial and emotional considerations have to be balanced.

Hear from our BOMAD community who now lend securely to family and friends.

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Borrowing Tips

Borrowing from someone you know is vastly different to borrowing from a bank, credit card company or other commercial lender. The relationship is the centre of the transaction. To make the loan a success, financial and emotional considerations have to be balanced.

The following 10 tips are designed with the single objective, to prevent friction between the parties throughout all phases – considering a loan, setting up a loan and its management till its repaid or forgiven.

 

Its been our experience that a considered process can often lead to a loan NOT being set up, and that is as good an outcome as the alternative. Openness, transparency, communication, detail and fairness are the elements that make lending between friends and family a success.

Consider all other options to a loan first

While a quick cash injection sounds attractive, a loan from either a lending institution or your parents should be a last resort. No matter how low the interest rate is or how long you have to play it off it’s an added responsibility to the multiple demands on any young person. First you need to ask yourself if what you need your money for is really that important. Would a cheaper car do just as well as the one you’re considering? Can you get a better deal on items you’re planning to purchase? Can you find just as good an item on eBay or Gumtree? Is it essential you have the item right now? Can it wait six months? Before you commit yourself to a loan — and it is a commitment — exhaust other options. It will bring peace of mind.

Ask for help from someone that can afford it

Mum and dad are the first port of call for kids who need help. But not all mums and dads are in the same financial position. So only reach out to your parents if you know they have the resources. Otherwise you’ll put strain on the relationship and, in some case, damage or destroy that relationship. It’s better that you look around to your extended family and family or within your circle of friends. It is more challenging to speak to a grandfather, an uncle or cousin about your financial situation. But if you are sure they’re in the position to lend you money, a reasonable approach — that is, a sensible request and solid payback plan — will be welcomed by family members and close friends. Making sure everyone feels respected and safe will ensure a good result.

Explain why you need help, and your plan to repay

Most parents love their kids unconditionally. They’re your parents!. But when it comes to money even they want to know reassurance you need it for something important, such as buying a car, furnishing a flat or simply making ends meet if you’re out of work. So don’t simply put your hand out and ask them to simply fund your lifestyle. Make your case. Tell them exactly what you want the money for and how you long you expect it will take to pay it back. And having them involved is smart. Your parents have plenty of life experience and will be able to give you all kinds of advice on how and where to spend that money. Get them on board and they’ll be with you all the way as you achieve financial stability.

Borrow only what you can afford

Most kids when they look at their parents see a bottomless well of money. That’s not the case. Most parents are either heading toward retirement or are already there, so they have their own financial concerns. So when you present them with a figure, make sure it it’s an amount they feel comfortable with and which you feel confident you can pay back, within the agreed amount of time. You don’t want to stress them with an amount they can’t afford and that you will struggle to pay back. Remember: if you behave responsibly with the amount borrowed and pay that amount back according to the agreed-upon schedule.

Offer to pay a fair rate of interest

Interest is something that parents often waiver when kids are involved. It’s the reason why so many young people reach out to the Bank of Mum and Dad. They simply cannot afford to be tied to burdensome loan repayment schedules and high interest rates. However, offering to pay interest is a fantastic gesture of good faith. It reveals you respect the contract and that you’re not a freeloader. If your lender waivers the interest that’s a bonus. Don’t expect it but it will be a nice surprise and further cement your relationship with your family and friends. Look after their interest and they will look after you.

Don’t negotiate for more than you need

Once your parents or whoever have agreed to loan you money don’t push for a greater amount. It will put pressure on the relationship even before the money has been transferred to you. Nobody likes a greedy person, even if they’re a member of your family. It’s also going to irritate the person who loans you the money to see their money earning interest in your bank account. If you feel you will need more money down the track do the right thing with your first loan and they will be more than happy to give you a second or even a third loan. Borrowing from the Bank of Mum and Dad is all about fostering good relationship. It’s one of extra benefits of the arrangement.

Document the loan and the agreed repayment schedule

We’ve all heard stories about people building businesses based on a handshake. Of course, that handshake was followed up by plenty of documentation that sealed and formalised the relationship. So when you approach the Bank of Mum and Dad for a loan by all means shake on on it and work out the numbers on a scrap of paper. But if it’s going to work and not cause stress within families or amongst friends you need to have a document that all parties sign, that includes an agreed repayment schedule. Even if there’s deep trust between family members and friends, it is much better to have the agreement spelled out clearly.

Set up automatic recurring re-payments

The best way to reassure the Bank of Mum and Dad that they’re signing a contract with somebody they can trust and with whom they’re happy to do more business, is by setting up an automatic repayment schedule. Apart from reassuring the person who loaned you money that you’re reliable it will help keep you on track knowing that an amount of money will be automatically transferred on a particular day. You also won’t be tempted to delay repayments and put a strain on the relationship. It’s simple to set up and an important way for the Bank of Mum and Dad to remain open in years to come.

Communicate any difficulties with repayment immediately

If you’re borrowing from the Bank of Mum and Dad it probably means that you have limited resources. You’ve approached them because you haven’t qualified for a loan from lending institutions, who are very prescriptive about what you do with their money. So there’s every chance that at some point during the life of the loan you’ll struggle to make a scheduled repayment. It is important that you make your difficulties known to the person who lent you the money. They will understand your challenges; it is why they lent you the money in the first place. Take them on the journey with you and they’ll not be like those nasty bankers you see in movies. They will be your financial partner.

Work to maintain the relationship

One of the benefits of going into a financial relationship with your parents, other members of your family or a close friend is that it can deepen and strengthen to bond between you. Of course, it has to be done correctly or the opposite can occur. It can damage and even destroy a one of the most significant relationships in your life. This is why a loan contract is an essential part of the relationship. It’s a simple document that will ensure that all parties are on the same page, quite literally. But that’s just the beginning. You will need to keep open the lines of communication for the life of the loan so suspicion and distrust doesn’t enter into the relationship. Clarity is the key to peace of mind.

The following 10 tips are designed with the single objective, to prevent friction between the parties throughout all phases – considering a loan, setting up a loan and its management till its repaid or forgiven.

Its been our experience that a considered process can often lead to a loan NOT being set up, and that is as good an outcome as the alternative. Openness, transparency, communication, detail and fairness are the elements that make lending between friends and family a success.

Consider all other options to a loan first

While a quick cash injection sounds attractive, a loan from either a lending institution or your parents should be a last resort. No matter how low the interest rate is or how long you have to play it off it’s an added responsibility to the multiple demands on any young person. First you need to ask yourself if what you need your money for is really that important. Would a cheaper car do just as well as the one you’re considering? Can you get a better deal on items you’re planning to purchase? Can you find just as good an item on eBay or Gumtree? Is it essential you have the item right now? Can it wait six months? Before you commit yourself to a loan — and it is a commitment — exhaust other options. It will bring peace of mind.

Ask for help from someone that can afford it

Mum and dad are the first port of call for kids who need help. But not all mums and dads are in the same financial position. So only reach out to your parents if you know they have the resources. Otherwise you’ll put strain on the relationship and, in some case, damage or destroy that relationship. It’s better that you look around to your extended family and family or within your circle of friends. It is more challenging to speak to a grandfather, an uncle or cousin about your financial situation. But if you are sure they’re in the position to lend you money, a reasonable approach — that is, a sensible request and solid payback plan — will be welcomed by family members and close friends. Making sure everyone feels respected and safe will ensure a good result.

Explain why you need help, and your plan to repay

Most parents love their kids unconditionally. They’re your parents!. But when it comes to money even they want to know reassurance you need it for something important, such as buying a car, furnishing a flat or simply making ends meet if you’re out of work. So don’t simply put your hand out and ask them to simply fund your lifestyle. Make your case. Tell them exactly what you want the money for and how you long you expect it will take to pay it back. And having them involved is smart. Your parents have plenty of life experience and will be able to give you all kinds of advice on how and where to spend that money. Get them on board and they’ll be with you all the way as you achieve financial stability.

Borrow only what you can afford

Most kids when they look at their parents see a bottomless well of money. That’s not the case. Most parents are either heading toward retirement or are already there, so they have their own financial concerns. So when you present them with a figure, make sure it it’s an amount they feel comfortable with and which you feel confident you can pay back, within the agreed amount of time. You don’t want to stress them with an amount they can’t afford and that you will struggle to pay back. Remember: if you behave responsibly with the amount borrowed and pay that amount back according to the agreed-upon schedule.

Offer to pay a fair rate of interest

Interest is something that parents often waiver when kids are involved. It’s the reason why so many young people reach out to the Bank of Mum and Dad. They simply cannot afford to be tied to burdensome loan repayment schedules and high interest rates. However, offering to pay interest is a fantastic gesture of good faith. It reveals you respect the contract and that you’re not a freeloader. If your lender waivers the interest that’s a bonus. Don’t expect it but it will be a nice surprise and further cement your relationship with your family and friends. Look after their interest and they will look after you.

Don’t negotiate for more than you need

Once your parents or whoever have agreed to loan you money don’t push for a greater amount. It will put pressure on the relationship even before the money has been transferred to you. Nobody likes a greedy person, even if they’re a member of your family. It’s also going to irritate the person who loans you the money to see their money earning interest in your bank account. If you feel you will need more money down the track do the right thing with your first loan and they will be more than happy to give you a second or even a third loan. Borrowing from the Bank of Mum and Dad is all about fostering good relationship. It’s one of extra benefits of the arrangement.

Document the loan and the agreed repayment schedule

We’ve all heard stories about people building businesses based on a handshake. Of course, that handshake was followed up by plenty of documentation that sealed and formalised the relationship. So when you approach the Bank of Mum and Dad for a loan by all means shake on on it and work out the numbers on a scrap of paper. But if it’s going to work and not cause stress within families or amongst friends you need to have a document that all parties sign, that includes an agreed repayment schedule. Even if there’s deep trust between family members and friends, it is much better to have the agreement spelled out clearly.

Set up automatic recurring re-payments

The best way to reassure the Bank of Mum and Dad that they’re signing a contract with somebody they can trust and with whom they’re happy to do more business, is by setting up an automatic repayment schedule. Apart from reassuring the person who loaned you money that you’re reliable it will help keep you on track knowing that an amount of money will be automatically transferred on a particular day. You also won’t be tempted to delay repayments and put a strain on the relationship. It’s simple to set up and an important way for the Bank of Mum and Dad to remain open in years to come.

Communicate any difficulties with repayment immediately

If you’re borrowing from the Bank of Mum and Dad it probably means that you have limited resources. You’ve approached them because you haven’t qualified for a loan from lending institutions, who are very prescriptive about what you do with their money. So there’s every chance that at some point during the life of the loan you’ll struggle to make a scheduled repayment. It is important that you make your difficulties known to the person who lent you the money. They will understand your challenges; it is why they lent you the money in the first place. Take them on the journey with you and they’ll not be like those nasty bankers you see in movies. They will be your financial partner.

Work to maintain the relationship

One of the benefits of going into a financial relationship with your parents, other members of your family or a close friend is that it can deepen and strengthen to bond between you. Of course, it has to be done correctly or the opposite can occur. It can damage and even destroy a one of the most significant relationships in your life. This is why a loan contract is an essential part of the relationship. It’s a simple document that will ensure that all parties are on the same page, quite literally. But that’s just the beginning. You will need to keep open the lines of communication for the life of the loan so suspicion and distrust doesn’t enter into the relationship. Clarity is the key to peace of mind.

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