If you are in desperate need of cash to pay bills, you may consider borrowing money from friends or family. In some cases, this can almost seem unavoidable. For example, if your lights are about to be cut off, or if you are going to lose your home to foreclosure, you may not have any choice but to consider asking for a personal loan from a friend.
However, “friends are worth more than money” and going down this path carries significant risks and should never be done except in the most dire circumstances. Even borrowing a few bucks for lunch can cause irreparable harm in a friendship if the money is not paid back in a timely manner.
Any time you borrow money from anyone you are taking a risk
Signing a mortgage for thirty years means that you are gambling that for the next thirty years you will be employed and able to make your house payments on time. This is never a certain bet; you may become ill and unable to work, or you could be faced with an expensive divorce or lawsuit. Still, few people choose to rent all their lives because they are afraid of committing to a mortgage loan. The attitude about mortgages often seems to be “let the future take care of itself.” In some ways this is a normal approach to most borrowing strategies, but it can backfire when you borrow from friends.
Banks are not your Friends and your risk is often limited to money
Mortgage companies or banks are impersonal entities, and if you cannot make your payments there are usually no personal hard feelings if the bank has to repossess your car or foreclose on your home. It may be a very stressful situation, but many do not personally blame the bank for its actions and the bank does not have any feelings of enmity toward you for your failure to pay back the loan. It is simply a case of “business as usual” for a bank if they are forced to repossess your property.
The situation when you borrow from friends is quite different, however. Borrowing from friends is setting yourself up for failure, because if something happens and you cannot pay the money back in a timely manner, you are sure to experience personal grief. Benjamin Franklin said, “If you loan money to a friend, you will lose both the money and the friend.” While this is obviously not true in every case, it is true often enough for the aphorism to be accepted as fact.
The problem with borrowing from friends is that both you and the friend have a personal stake in the matter
It cannot be “business as usual” as it is when you are borrowing from a faceless, nameless institution such as a bank. If you fail to pay back the loan, your friend is placed in the terrible position of having to ask you for the money, and you are faced with the awkward prospect of having to refuse to pay the money back. It might be that your friend really needs the loan repaid in order to pay his or her own bills, but you are unable to make the payment, placing your friend in a compromising position.
It is easy to see how borrowing money from a friend could result in the ending of a friendship and lead to harsh and incriminating words that will never be forgotten by either party. Therefore, the best rule is not to borrow money from friends in the first place, so that neither you nor your friend is placed in this position.
If you are truly desperate for money there are usually other sources from which you can obtain short-term loans. Some banks make short term (90-day or six-month loans) but you have to have fairly good credit to qualify for one of these loans. Small loan companies often have less stringent requirements. While small loan companies charge terrible interest rates, the psychological value of borrowing from a business rather than a friend may actually force you to make the payments in a more timely manner, and this may help your credit rating. Small loan companies will often lend you money with your personal property as collateral, so almost anyone can get a loan from a small loan company unless the borrower has filed bankruptcy or had other serious black marks on his or her credit score.
If you simply cannot borrow money from any other source and are forced to take a loan from a friend, insist on the loan terms being put into writing. This will not only protect you in the event there is a misunderstanding with your friend about the terms of the loan at a future time; it will also protect your friend in case he or she has to collect the loan from you later. You can draw up a simple contract yourself or get a contract form from a legal supply company.
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