How to Borrow Money from a Friend or Family Member in 10 Easy Steps

Written by:

admin

Published:

28. november 2022

In many cases acquiring a loan from a friend or relative could be far better than applying for a loan from a bank. However, a lot depends on how you set up and manage these types of loan. Avoiding social friction and establishing terms that both parties feel confident with is key to a successful friend and family loan.

One of the most common complaints we hear from people taking a loan from friends and family is that it can be difficult socially to enter into this type of agreement. This is why it is imperative for everyone to be clear on the terms of the loan and to treat it the same as you would a traditional bank loan.

To help you have a successful friend and family loan experience we have created a helpful 10 point guide to managing a friend and family loan.

  1. Consider all of your loan choices.
  2. Take into account the monetary and social dangers
  3. Make the correct inquiries.
  4. Go over all of the loan specifics.
  5. Establish a schedule for debt repayment.
  6. Locate a loan arbitrator
  7. Offer to pay interest on the loan
  8. Complete the agreement and put it in writing.
  9. Always pay your bills on time.
  10. Actively discuss the loan with others.

  1. Consider all of your loan choices.

If there are alternative personal loan choices then you should explore these first. Do your homework and find out all your options before immediately borrowing money from friends and family. It may be preferable for you to borrow money from a bank or other financial institution than someone you know. At least understand your options and positions so you can state your reasons for asking for a loan from friends and family rather than an alternative source.

Even without a loan, you can ask friends and family for financial assistance. If you have low credit and can’t get a loan on your own, for example, you can ask them to cosign the loan. Or you might ask whether they would be willing to provide the savings collateral so you could obtain a loan secured by your savings.

The benefits and drawbacks of borrowing money from family and friends

ProsCons
Keeps you away from predatory lenders;Potential awkwardness or hard feelings
lower interest rate (and typically more forgiving repayment terms) than you could have obtained from traditional financial institutions.Lack of clarity on loan terms can cause confusion
Possible to source credit with low credit scoreAbsence of loan documentation can leave both parties unprotected    
Helping people you care aboutDifficulty managing repayment

Horde Friend loan app has been developed to solve the cons by providing a comprehensive loan agreement plan, repayment options, calculating interest, managing repayment, making payments, sending reminders, and providing a full overview of the loan for both parties.

  1. Take into account the social aspect of the loan

Many people state that the worst aspect of taking a loan from friends and family is the social awkwardness. Many people find it difficult to discuss their finances and asking for help can be difficult. This is where the friends and family app steps in. If you have done your research in step one, you will be in a position to put this loan into a professional framework. Why do you want the loan? Why are other lending solutions a bad fit? How much are you asking for? What are the  repayment terms you are suggesting? How will you manage the loan?

  1. Make the correct inquiries.

Understand the financial situation of the person you are borrowing from. I’m sure we would all like to help out friends and family who ask for help and as a result we see situations where people will offer to loan money, and then their own financial circumstances change. There is nothing worse than knowing you have debt to a loved one and seeing them struggle financially. Be sure that the person you are asking to loan money from are in a financial situation to provide this loan. You should also discuss the situation if a repayment is missed or the money suddenly needs to be repaid quickly.

Many individuals feel embarrassed about borrowing money from a family member or friend, but if you handle the business transaction appropriately, it can be a win-win for both of you. Of course Horde friend and family app takes care of this for you.

  1. Go over all of the loan specifics.

You must be completely honest when applying for a loan regarding all of your needs and requests. Make sure you go over every aspect of the loan, including the opening sum, the repayment schedule, and any additional loan conditions.

For instance, whether you want any interest or late fees to be added, and if the payback will be made in installments or in one big sum. The discussion should include that the borrower genuinely has the ability to repay the loan, and by when. Ensure that you address «what would happen if the person fails to repay the debt.” You’ll be in the greatest possible position to deal with a worst-case scenario if you prepare for it before it happens.

  1. Establish a schedule for debt repayment.

If the loan will be repaid in installments, create a detailed payment schedule and give it to the lender. The Horde friend and family app will take care of this. Knowing when to expect your payments and when the loan will be repaid in full should help to reduce any anxiety.

Making the loan payback process as clear and stress-free for the borrower is just as important as for the person loaning the money.

  1. Locate a loan arbitrator

It can be beneficial to employ a middleman as you work out the specifics of the loan and how to set it up. Ask a third party to assist you in coming to an agreement that benefits both parties. Make sure everyone feels like they are getting a decent deal and agree to the loan’s particular terms, conditions, and repayment schedule.

It is entirely up to your friends and family to decide if you will charge interest or what interest rate to charge. In the same way as you would if you were looking around for a personal loan among banks, the borrower should assess alternative lending choices and suggest a fair level of interest.

Horde friend and family app helps you document these conditions for both parties to approve.

  1. Choose to Pay interest

By paying interest on the loan, you can demonstrate your good faith as a borrower. Even if it is a very low interest rate it helps for both parties to see the loan as a professional agreement.

According to some experts the rate of interest should be at least equal to what your family member or acquaintance would get if he put the money in a savings account. Although that really depends on the relationship and reason for the loan. The rationale is that the lender is doing you a favor and by charging interest, youI make sure that both parties profit. The interest rate will likely be cheaper than what a bank would charge, and your lender will benefit from the growth of their capital.

  1. Don’t take on too much.

You must be practical about your loan at every level and make sure you don’t borrow more than you can afford to pay back.

It’s a warning sign if you’re concerned that you’ll experience difficulties or won’t be able to pay back the loan at any point. Rework your agreement until you are certain that you can keep your half of the bargain.

  1. Put the agreement in writing once it has been finalized.

Create an upfront, transparent, and equitable payback plan to safeguard the personal relationship. Put it in writing, and then follow through with it. Use Horde friend and family app to document the conditions of the agreement and have both parties accept before transferring funds.

  1. Always pay your bills on time.

Naturally the easiest way to avoid the loan causing social friction is to make prompt payments.

«The borrower must not think that it will be OK if [they] do not pay on time and according to the terms of the loan just because it’s a friend or family member». The connection should be handled exactly as if it were one with a bank or other official lender. Horde friends and family send you reminders and allow in-app money transfers for seamless repayments.

Bonus tip. Good communication

Send payment reminders, payment confirmation, balance of loan, ask for deferment in a timely manner. Of course all of this is done for you and can be managed from within the Horde friend and family app.

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support@horde.app

Horde has a license as a payment institution from Finanstilsynet and is a member of Finans Norge.

© 2022 Horde AS. All rights reserved

Lars Hilles gate 20A, 5008 Bergen, Norway

© 2022 Horde AS. All rights reserved.