11 Steps You Need to Follow If You Borrow Money From Friends or Family

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If you’re trying to apply for a personal loan with bad credit and can’t get approved, borrowing money from friends and family might be a last-ditch option. But is that an option you really want to consider?

Accepting a loan from a friend or family member can be a stressful process, both financially and socially.

“Many people feel awkward about borrowing money from a family member or friend, but if you handle the business transaction correctly, it can be a win-win for both of you,” says Carla Dearing, co-founder and CEO of SUM180, an online financial wellness service.

However, if you and your lender are clear on the terms and take them seriously, it could be a worthwhile money move for everyone involved.

11 steps for borrowing money from friends and family

By following these 11 steps for borrowing money from family or friends, you’ll be able to reach a mutually-beneficial arrangement that the relationship will survive.

Take a look and see if this 11-step process is feasible for you.

1. Look at all your borrowing options

Before you jump right into borrowing money from friends, consider if there are other personal loan options you can turn to first. For instance, it might be better for you to borrow from a bank or financial institution rather than an individual you know.

That way, if you have a hard time paying the money back, you can deal with a lender that has money in the bank. You also avoid putting someone you care about in a financial bind.

Or, instead of financial help, you ask this person to be a co-signer on a loan. This can help you out if you have bad credit and wouldn’t qualify on your own.

Additionally, you could see if they’d be willing to supply the savings collateral for you to take out a savings-secured loan.

2. Consider the financial and social risks

Make sure you also understand the risks of borrowing money from friends and family, and that you’re willing to face them.

Remember, this type of loan will have all the same risks as other debts. And according to Shaolaine Loving, a Las Vegas attorney, you “will be entering a legally binding contract allowing [the lender] to sue if [you] breach any of the repayment term.”

There’s also the added risk of damaging your relationship with this person. You can’t afford to just assume that everything will turn out well. Therefore, make sure you are prepared to borrower responsibly to avoid hurting the relationship.

3. Ask the right person

From the start, you need to be considerate of other people’s financial situations and obligations. Asking for a loan from someone who can’t afford to give it or who doesn’t trust you will just put everyone in a tough and awkward position.

Therefore, don’t ask to borrow money from a friend or family member who you’re not confident can afford to give you a loan. It would also be appropriate to limit your asks to people with whom you have a positive and close relationship.

4. Discuss all the loan details

When you ask for a loan, you need to be upfront about everything you need and are asking for. Make sure you cover all the loan details such as the initial balance, how it will be repaid, and other loan terms.

Additionally, Loving says you should discuss “whether you want any interest or late fees to append, and whether the repayment will be in installments or in a lump sum.”

Money coach Lisa Chastain says, “The discussion should include that the person borrowing can actually afford to pay back the loan, and by when.”

Most importantly, Chastain says to make sure you cover “what will happen if the person fails to pay back the loan.”

5. Create a loan repayment timeline

If you’re making installment payments on the loan, outline the full schedule and share it with the lender.

“Knowing when to expect your payments and when the loan will be repaid in full should ease any anxiety your family member or friend may have,” Dearing says.

“You show your gratitude for the favor of the loan by making repayment as transparent and stress-free for him or her as possible,” Dearing adds.

6. Find a loan mediator

As you’re hashing out the details of the loan and how to set it up, it can be helpful to get a middleman involved.

“Find someone who is a neutral party who can help you reach terms for both parties,” suggests Chastain. “Be sure that each party feels like they are getting a good deal, and agree to specific terms, conditions and a payback plan for the loan.”

7. Insist on paying interest

Another show of your good faith as a borrower is to pay interest on the loan.

“Insist on paying interest at a rate of at least what your family member/friend would earn if he put the money in a high-yield savings account,” Dearing suggests.

After all, this is a favor to you – and paying interest ensures it financially benefits both parties. At the end of the day, you’ll probably get a lower interest rate than a bank would offer, and your lender can see their money grow.

“With bank rates as low as they are these days (one to two percent), by asking for a loan and offering to pay four or five percent interest, you could be doing your family member a favor,” Dearing explains.

8. Don’t overcommit yourself

At every stage, you have to be realistic about your loan and ensure you don’t borrow more than you can afford to repay. Your relationship will depend on it. That’s why Loving says borrowers should only agree to terms they think they can uphold.

If you’re worried you’ll hit bumps down the road or be unable to repay the loan at any point, that’s a red flag. Go back to the drawing board and rework your agreement until you’re confident you can uphold your end.

9. Finalize the agreement – and put it in writing

“Protect the personal relationship by creating a clear and fair repayment plan up front,” Dearing suggests. “Put it in writing—and then stick to it.”

A promissory note is a common way for two individuals to formalize a loan agreement. Putting your loan terms in writing will protect both your interests and the lender’s.

“An agreement will allow you both to be clear on expectations so that you don’t prematurely expect payment and feel bitter about nonpayment if terms aren’t outlined from the start,” Loving points out.

10. Make payments on time, every time

Once you agree on the loan and the funds are handed over, be diligent about making payments. You can even check if your bank allows you to set up automatic direct deposits or transfers.

“The borrower must not think that just because it’s a friend or family member that it will be okay if he does not pay on time and according to the terms of the loan,” Chastain says. “Treat the relationship just as he would if it was a bank or official lender.”

11. Actively communicate about the loan

As you pay off the loan, you should also try to be proactive and communicate regularly about your loan. Get your lender to send you confirmation of payment each time they receive funds from you. This will help protect you from any errors, as well as catch any transaction issues.

And if you ever run into issues, talk to your friend or family member right away.

“If it turns out he cannot make payments as promised, then he should approach you promptly with a realistic proposal of alternative payment options,” Loving says. “That way, the borrower doesn’t come off as trying to shirk his obligations.”

Keep your relationship strong

Borrowing money from friends and family can be an affordable way to get a loan, and remove the hassle of credit checks and applications. But with a relationship on the line, you can’t afford for the arrangement to turn sour.

Take your lending arrangement seriously, follow these steps, and you’ll still be on speaking terms by the time you make your last payment.

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LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal Loans: Fixed rates from 6.990% APR to 14.865% APR (with AutoPay). Variable rates from 6.255% APR to 12.555% APR (with AutoPay). SoFi rate ranges are current as of September 1, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.255% APR assumes current index rate derived from the 1-month LIBOR of 2.08% plus 4.425% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

    To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.See Consumer Licenses.
  2. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  3. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  4. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 4.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 4.99% APR loan, a borrower will need excellent credit on a loan of $15,000 with a term of 24 months, and qualify for at least two of the following discounts: (1) add a co-borrower who has sufficient income; (2) use at least fifty percent of the loan proceeds to directly pay off existing debt; or (3) show proof of having at least forty-thousand dollars in retirement savings – contact FreedomPlus for further details.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 15.49% APR to a high of 34.49% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.


7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33


* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

7.73% – 29.99%$1,000 - $50,000Visit Upstart
6.26% – 14.87%1$5,000 - $100,000Visit SoFi
6.99% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%2$5,000 - $35,000Visit Payoff
4.99% – 29.99%3$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%4$5,000 - $50,000Visit Citizens
15.49% – 34.49%5$2,000 - $25,000Visit LendingPoint
6.16% – 35.89%6$1,000 - $40,000Visit LendingClub
6.99% – 18.24%7$5,000 - $75,000Visit Earnest
9.95% – 35.99%8$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

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