What’s the Best Way to Borrow From Friends or Family?

Photo by By yesstock / Shutterstock.com

Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about borrowing — specifically, how to properly borrow from friends and family.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “7 Dumb Ways to Borrow Money” You can also go to the search at the top of this page, put in the word “borrow” or “loan” and find plenty of information on just about everything relating to this topic.

And if you need anything from tips on finding the best savings account to finding the best financial advice, be sure and visit our Solutions Center.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Heather:

“What is a good way to pay back a loan from friends or family? Obviously, they don’t charge interest, but in how much time should it be returned, and how much money should each payment be monthly?”

I’ve covered this issue in various ways before, but let’s take a run at it one more time.

Borrowing from friends and family the correct way

Borrowing from — or lending to — friends and family is one of the most effective ways to destroy relationships. Thus, it should always be kept to an absolute minimum.

Life being what it is, however, sooner or later we’re all likely to be on one side or the other of these transactions. So, how do we do it correctly?

The following advice is for those borrowing a significant amount of money, not just spotting a pal $50 until payday.

If Heather decides to borrow from friends or family, she should approach it as she would any other loan. In short, she should do it formally, which means in writing.

She can download a free promissory note form online from a variety of sources, such as Rocket Lawyer.

She could also get the loan documents notarized. This will show the lender she’s serious about repaying the debt, as well as protecting both sides if things get ugly.

She should be specific about repayment terms. “As soon as possible” is a term vague enough to be interpreted as any time from next week to never. Spell out what happens if you should die before the loan is repaid, or if you should be unable to repay it.

Speaking of terms, I smiled when I read this part of Heather’s question: “Obviously, they don’t charge interest.”

Is it obvious that friends or family members shouldn’t receive compensation for the risk they assume? While I’ll stop short of saying a family member should always charge interest, I certainly wouldn’t label no-interest loans “obvious.” Were I to borrow money from friends, family or anyone else, I’d offer to pay interest.

Finally, the last part of Heather’s question is about how soon the money should be returned and how much each payment should be.

Answer? We repay all loans the same way, which is as soon as possible. While the terms you agree to shouldn’t require you to pay more than you can comfortably afford — and thus endanger your ability to meet your obligations — the best place to be when it comes to debt is out from under it.

So, pay it back as quickly as you can. Make your lender happy they agreed to help you.

Lending to friends and family

And now, a few words about lending to friends and family.

If you’re going to lend to friends and family, rule No. 1 is this: Don’t lend money you can’t afford to lose.

Of course, it’s hard to say “no” when friends or family approach us. So, how do we go about it? By saying things other than “no,” such as:

  • “I have a strict anti-lending rule: I’ve lost too many relationships this way.”
  • “That’s not in my budget. Sorry.”
  • “The last time I lent you money, you didn’t pay it back. I can’t do it again. Sorry.”

The most important thing you can do is to formulate a policy before you need one. Then, you won’t have to think on your feet when the situation arises. Maybe you only lend in dire emergencies, or to relatives with jobs. Or, perhaps you decide not to lend to anyone under any circumstances.

The important thing is to decide on a policy, memorize it, practice saying it and stick to it — no exceptions. Your response should be immediate and firm.

Hope that answers your question, Heather.

I’m Stacy Johnson. See you next time!

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!

The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here.

Also, questions should be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Ways Retirees Can Lower Their Income Taxes

Here’s how to keep Uncle Sam’s mitts away from your nest egg.

Watch This: Organize Your Home With Dollar Tree Products

Here’s how to organize every corner of your home using only items from a dollar store.

5 Medicare Mistakes to Avoid for a Healthy Retirement

Medicare can be confusing. Beware these missteps — which can hike your costs.

7 Reasons Not to Move When You Retire

Sunny skies and warm breezes sound great. But in reality, you might be better off retiring closer to home.

9 Indestructible Products That Are Worth the Price

If you’re willing to pay a little more for these products, you may never have to shop for another again.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Mistakes Everyone Makes When Shopping on Amazon

Are you losing money due to any of these missteps?

7 Changes Coming to Social Security and Medicare in 2021

Recently, both Social Security and Medicare made some major announcements about benefits for 2021.

Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?

The rules are complicated when it comes to eligibility for survivors benefits.

Can a Twice-Divorced Woman Claim Social Security Survivors Benefits?

Understanding survivors benefits rules is the key to getting the most from your benefit.

These Are the 10 Worst Cars for Depreciation

Two types of vehicles are especially likely to see steep plunges in value.

10 Things I Always Buy at Trader Joe’s

From snacks to sweets to side dishes, stock your cart with these time-tested favorites on your next TJ’s run.

9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

5 Ways Social Security Will Change in 2021

These adjustments will affect both workers and retirees in the new year.

8 Things You Should Buy at Restaurant Supply Stores

You don’t have to be a chef or a restaurant owner to shop here.

3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

19 High-Paying Jobs You Can Get With a 2-Year Degree

There are easy high-paying majors available in the U.S. — and no bachelor’s degree is required. We’re here to help you find easy degrees that pay well.

Stop Buying These 19 Things Online

The internet has changed how we shop. But for some things, you’re still better off buying the old-fashioned way.

Cut These 11 Expenses Now If You Hope to Retire Early

Like the idea of financial independence? Part of the FIRE equation is cutting costs.

27 Things You Should Never Pay For — and How to Get Them for Free

When you know the tricks, you can save big on all kinds of useful things that others pay for.

4 Tax Credits That Will Be More Generous in 2021

If you are eligible for these tax breaks, they will slash your federal income tax bill — dollar for dollar.

15 Things You Can Get for Free in December

December is here, which means it’s your last chance to take advantage of fabulous freebies in 2020.

7 Tips for Building an Emergency Food Supply

A pandemic or natural disaster could leave you reliant on your existing emergency food supply. Is your pantry well-prepared for emergencies? Knowing what to stock up on for emergencies can be a difficult task and we’re here to help.

7 Reasons to Carry Mortgage Debt Into Retirement

It often makes financial sense to not pay off your mortgage before retiring.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.