The tendency to borrow from friends and family has greatly reduced in recent years due to the easy availability of institutional loans with convenient repayment terms. Nevertheless, it’s still a popular resort when we fail to secure a loan due to a bad credit score, previous unpaid loans, or any other reason.
There may be friends and family members who are happy to help in our time of financial need. However, you need to consider some fallout scenarios before seeking their help. Let’s look at some of them:
Low or no interest component
While taking a loan, the rate of interest is an important factor in deciding on a lender. However, while borrowing from a friend or family member, interest is not usually discussed. Both parties seem to arrive at an understanding that interest is either not charged, or charged as an informal amount. So, in this type of loan, the lender is likely to lose some interest income.
Vague repaymentterms
This is a major feature of loans taken from friends and relatives. It is often not possible to put the terms on paper when you borrow from them. Such borrowings are often finalised instantly over a cup of tea and a shake of the hand. Sometimes disputes and arguments take place due to the lack of any concrete agreement in the first place and the parties may resort to ‘he said / she said’ accusations.
Sheer awkwardness
It is a normal occurrence to take a loan from a bank and then visit the same bank a few days after. However, when we meet a friend or relative from whom we have borrowed money, there will be a subconscious feeling of indebtedness and you are very likely to mention at least once that you are working towards repaying the loan and that it is on your priority list. You may embarrass your money-lending friend by mentioning the same thing every time you meet and this awkwardness can affect your friendship.
Inability to pay during their time of crises
If the friend you borrowed from is ever in need of money, you could be faced with the situation of being unable to help them in return. It’s quite possible for your friend or relative to have an unexpected financial crisis of their own soon after they lend you money. Having taken the loan for a genuine purpose, you may already be broke by the time your friend comes up to inquire if you can repay the loan earlier than agreed. A feeling of guilt can descend on you as you feel responsible for the financial trouble your friend is in.
Risking the relationship
Whenever we borrow – or even inquire about borrowing – from our friends or relatives, we run the risk of distancing them. Owing money can affect the purest of friendships. There are many emotions at play when we interact with someone to whom we are financially indebted to. We will consider various additional aspects before talking to them, and vice versa. In other words, bringing in a financial angle to a relationship can complicate it, sometimes irreversibly. The fact that you had taken a loan from a cousin may be enough to strain the relationship if it is mentioned carelessly in a random conversation years later.
Available security when you fail to pay loan repayments
This is an aspect you should consider while taking a loan from a friend or a family member. Banks always ask for a secured compensation in the event you fail to repay back the borrowed funds. It can be in terms of secured asset, such a car, property any other asset of value, or in the case of unsecured loans, high interest rates. In the event you fail to pay back the borrowed funds, the bank will seize the asset, or compensate by charging a late penalty on your next EMI.
A friend is unlikely to do something like that, leaving them at a loss of funds. That’s why if you later realise you cannot afford to repay a loan taken from a friend or family, the entire discussion around it becomes very complicated; jeopardising your friendship.
Is there a better option?
Any of these scenarios may make you wonder whether asking your friend for help was the right decision. What if they suddenly develop a superiority complex over you? What if it becomes an open secret that you are the financial black sheep of the family? What if your friends go out to dinner in a fancy restaurant but leave you out, because they know you are financially in a spot? Situations like these might make you consider that a discreet EMI arrangement with a bank would have given you more peace of mind.
Convenient and beneficial as it is, a loan taken from a friend or a relative comes with its own risks. Therefore, it is wise to explore all the available loan options before turning to our near and dear to borrow money.
One such option could be applying forHDFC BankPersonal Loan. Itsfeatures include, among many others, checking your loan eligibility online in one minute and loan disbursal in one working day after you submit your documents. Selected pre – approved customers can get their loan disbursed in their account within 10 seconds and non HDFC Bank customers can get their loan disbursed within 4 hours. You can also take advantage of the flexible repayments of Rs. 2,149 per lac.
Readmoreon the different reasons why you shouldn’t borrowing money from friends and family.
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