Borrow Money From Real People – Borrowing money from friends and family is often a terrible idea. This puts your relationship at risk and can lead to guilt, resentment and loss of trust.
No one wants to be in a situation where they have to rely on someone else to pay the bills. But high debt and low savings mean that many Americans are in a hurry to get out of this unpleasant situation.
Borrow Money From Real People
If your back is against the wall and a loan from a loved one is the most responsible way to get out of a bad financial situation, a loan may be the best option. But if you go this route, make sure you do it the right way. Here are the steps you should take when borrowing money from a relative or friend.
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When you borrow money from a bank, you have to fill out an application, show your entire financial situation, and sometimes even post a guarantee. If you have a personal relationship with the person you borrowed money from, it does not mean that you should avoid this process.
In fact, preparing a short presentation explaining why they should lend you the money can help them see how serious you are about the loan and understand why you need the money. Enter details such as how you will use the money, how long you will repay the loan, and how much interest you will pay.
“I’ll pay you when I can” shows that paying off the debt is not your priority. This is significant considering that nearly three quarters of people who borrow money from friends or family do not repay the loan in full.
Carefully breaking down how you will respond to your partner will greatly increase their confidence in your ability and willingness to pay. Enter details such as when you will start paying, how much you will repay each month, how you will make your payments, what is the monthly payment due date and the date the loan is fully repaid.
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If you really want to go the extra mile, show them your monthly household budget and how you can make your monthly payments easier.
There is a possibility that you will not be able to repay the loan according to the schedule you agreed upon. Have a plan that says what will happen if you don’t pay.
Offer to pay late fees if you fall behind on your payments. Late fees should increase over time, meaning the more late you are, the more fees you pay.
If you want to show your willingness to repay the loan, you can also offer a guarantee. Allow your loved ones to keep your valuables such as jewelry until you pay off the loan in full.
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All the details discussed so far should be written down and made into an agreement that you both sign before the money is released. After you sign, you should both receive a copy of the agreement. If a dispute arises, look at the loan agreement instead of arguing with your loved one about what was originally agreed upon months or years ago.
Most banks allow you to set up recurring transfers to other bank accounts. Once your payment period begins, automate the payment process by setting up recurring monthly transfers to the borrower’s bank account. Doing this will ensure that the ball does not drop suddenly when throwing. Lending money to family and friends can be an act of kindness when someone you know is struggling financially, but it can be problematic if your efforts lead to disagreements or financial problems.
According to a 2022 study by Creditcards.com, 42% of respondents said they lost money on loans made to friends or family. If a friend or family member approaches you for a loan, remember these ads and don’t take them to heart.
There are certain situations where your friends or family may approach you for a loan. For example, you may be eligible for a loan if:
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While you may feel pressured or compelled to offer a loan, it’s important to consider whether it makes sense for you and your financial situation. For example, if lending money to someone could interfere with your personal finances and make it harder for you to make your payments, it might not be the best move. On the other hand, if you have an emergency fund, little or no debt, and you receive a regular salary, it may not be difficult to manage the loan.
In addition to the financial impact, it is also important to think about the potential return on your money. If the friend or family member applying for the loan is responsible for paying the bills and is facing a one-time financial crisis, repayment may not be a problem.
If, on the other hand, you are someone who has a history of financial irresponsibility, you may be more of a risk to lend to them.
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If you’re borrowing money and hoping to pay it back, being selective about what you offer is important. Limiting loans to friends or family members who you trust to pay their debts can help you avoid financial and emotional headaches later. In the Lending Tree survey, for example, more than a third of borrowers and lenders reported negative outcomes, including dissatisfaction and emotional distress.
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If you don’t feel comfortable lending money to someone, it’s okay to say so. You might get a response, but it’s important to lend money when you’re confident it won’t make the relationship go south.
Consider asking your lender for some type of collateral equal to the loan amount that you can hold as collateral until the loan is paid off.
Borrowing a lot to help someone is a bad idea if it puts pressure on your own money. When deciding how much to lend someone, a good way to put it is to think of the money as a gift. In other words, how much money can you afford to lose without hurting you financially?
That doesn’t mean you think you won’t get paid. Instead, it helps you set realistic limits on lending to friends and family, so you don’t need a loan later.
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When you lend money to friends or family, having a paper trail can help you avoid misunderstandings. Drafting the loan agreement that you and the borrower agree to and sign clearly outlines your responsibilities and gives you a basis for legal charges if you end up suing them later. to get your money back.
For larger loan amounts, it may be wise to have a lawyer draft a contract for you. You can also talk to a tax expert if you plan to pay interest on the loan.
If you intend to pay interest, it must be at the lowest rate in accordance with the applicable federal law (AFR). For loans over $10,000, the interest is considered taxable income. Even if you don’t pay interest, you may still have to report the money as a gift if it isn’t repaid.
If you choose to give money to friends and family as opposed to taking out a loan, you can give up to $16,000 per year per person in 2022 (increased to $17,000 for 2023) without giving rise to the gift tax.
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This should be obvious, but it bears repeating. Borrowing more money than you can actually afford can cause problems if the person you loaned the money to doesn’t pay on time or you find it difficult to keep track of your spending.
It is also important not to allow guilt or other pressure to force you to lend money to someone you know. If you feel compelled to lend money to someone when it doesn’t make sense for you financially, it’s worth taking a step back to think about other ways you can help them. For example, you can point them in the direction of other sources that may provide financial assistance in addition to loans.
By signing, you are both legally responsible for the debt. If the other person defaults on the payment, the creditor can approach you for payment.
You can offer to co-sign a personal loan for a friend or family member instead of lending them money yourself—or maybe let them use your credit card for a while. That way you don’t have to pay out of pocket.
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However, the loan may affect your credit score, as your application, payment history and credit balance will appear on your credit report. And if someone else uses your credit card to make a purchase, you are directly responsible
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