When all seems to be going wrong, there’s always a cherry to go on top to make the world’s worst problematic cupcake, especially when money is involved. When you feel like you’re in full crisis mode and find yourself trying to piece together the remains of your finances and budgets, it’s easy to think of what quick fixes you can make. But when it comes to the point where you’re considering borrowing some money to alleviate some of your financial problems, what is the best point of action? 

“Should I take out a credit card?”; “where can I borrow money from?”; “Should I take out a personal loan?”; “Should I ask my parents?”; “Should I accept the money my friend offered me?” are just some of the questions that might race through your mind. In this article, we’re going to be exposing the good, the bad and the ugly of borrowing money from friends and family. 

Are the budgets in order? 

Before asking if you should turn to the bank or a relative to borrow cash, take a look at your finances and familiarise yourself with what is what. If you don’t have a budget in place for your finances, the cycle of surprise expenses is likely to return. Always make sure to prioritise the ‘emergency fund budget’ so you’ve already budgeted for any unexpected expenses before they even exist.

What is the reason for needing extra cash?

If your budget is a little unclear, or you’ve not yet put one in place, differentiating between needs and wants becomes blurry. If it involves your home or your car maintenance it tends to be a need but other categories can be unclear, so sit and think about what the money you want to borrow will be spent on. Do you really need it?

If you manage to pinpoint it as a need, you should look at your finances and see if there are any wants that can be temporarily sacrificed taking on debt. But if it seems apparent that it is a want, consider postponing spending the money on it until you can properly afford it. 

I still need some extra cash…

Ask yourself if you have time to create a secondary or passive income to aid in building your emergency fund. There are so many great ways to earn money on top of the classic 9-5. This could be a great excuse to sell that clutter that’s been sitting in the corner of your house for months or a way for you to sell those skills that have been unused for years. What we’re saying is acquiring extra money does not (always) mean taking out credit and debt. 

But if you are looking into borrowing money, and especially when someone you know offers the money on a friendly loan, don’t jump to accept straight away. Borrowing money is always complex, whether it’s going to the bank or your friend. 

The Good Side of Borrowing from Someone You Know

Obviously, it’s great when someone you know is willing to lend you the money; it shows they care about your wellbeing. And when you set appropriate terms, boundaries and expectations of the deal you are making it can be a positive experience. It’s beneficial for the borrower as there are no interest rates, it’s a relatively quick process and there is a flexible option when it comes to making repayments. 

In most scenarios, repaying borrowed money means that it won’t be paid in full, especially when it’s a considerable amount. Creating an action plan at the beginning of the process will keep everyone on the same page, similar to finance options or going to the bank. 

The Bad Side of Borrowing from Someone You Know

Like any other kind of debt, the act of borrowing can still weigh heavy even if the lender is very relaxed and doesn’t place any pressure to repay them right away. Until you fully pay off the debt, it can loom over you and the lender, and when you have a relationship with the lender it can cause unnecessary strain. 

Borrowing money is draining mentally as well as financially, it can feel like a lifetime until you can fully pay off the debt. Like other forms of debt, it steals from your monthly income and it means you will always be trying to catch up until you cut debt out from your life. 

The Ugly Side of Borrowing from Someone You Know

The difference between borrowing from the bank and your friend or family member is emotions. There is no emotional tether between you and a bank and a bank and its money. But a lot of people are emotionally invested in their financial wellbeing, as well as in their friends or relatives. On top of this, the nature of lending/borrowing between friends is usually informal, meaning that the steps that banks take before lending money isn’t taken into consideration.

Regardless of the relationship, the dynamic will always shift when money is involved. It creates a power imbalance that wouldn’t be a part of any relationship without this exchange. The pressure and tension between a borrower and lender who know one another can cause the relationship to sour.