There are plenty of awesome reasons why people choose to take loans from family and friends.
Flexible lending terms, typically low-interest rates, and quick access to the money you need can all make this an attractive option for borrowers.
But for lenders, family and friends loans often represent an uncomfortable degree of uncertainty and risk.
We wanted to take a second to address some of these potential disadvantages, as well as talk about some of the ways that you can counteract them as either a lender or borrower.
As a borrower, it can be easy to view family and friends loans as being a fairly casual process, but ignoring the anxieties facing many lenders who go through this process can be a big mistake.
One of the biggest mistakes people make when getting a loan from family or friends is not laying out clear terms early on in the process. It’s obviously up to both the lender and borrower to decide if they want to introduce things like interest rates and late fees into the agreement, but even if details like that are ignored, there should be some kind of understanding of what happens if, for example, the borrower misses a repayment.
Even if you as a lender have total faith in your borrower’s ability to repay you, having a clear, official agreement highlighting these terms can go a long way toward providing you with a little peace of mind.
On a similar note, just because both of you agree on the terms of the loan doesn’t mean that you both will have the same expectations for the repayment process, or for what the lending process will mean for your relationship moving forward.
That is to say that sometimes when a person lends money for something like a business, they can start feeling a sense of ownership over that business (particularly when the lending process is casual or informal, as it often is in family and friends loans). These feelings can lead to lenders stepping in or trying to influence decisions in the way their loan is spent, even if they don’t technically have any legal control over these things.
When friends or relatives start feeling entitled to meddling in this way, it can be tough to salvage the relationship or return things to normal. But a good way to head off this potential issue early on is, once again, to have a formal loan document in place.
Documents like this can give borrowers caught in these kinds of positions the leverage they need to have difficult conversations with pushy lenders. And if these conversations don’t go well and the two parties end up in litigation, loan documents can protect entrepreneurs from any further harm.
Even outside of the extreme situations presented above, exchanging large sums of money between friends or family always has the potential to become a fraught or uncomfortable process.
Having clear, open conversations early on can go a long way toward providing both parties with an understanding of one another’s expectations. But those conversations won’t always be enough to keep both parties on the same page.
What’s more, close relationships are often volatile, and you never know what might happen in the future that may cause your relationships with friends or loved ones to break down.
When they do break down, dealing with the fallout of these relationships can already be a stressful, uncomfortable process.
Imagine, for a second, one of these breakdowns happening between you and a loved one.
Now imagine that you owe that person thousands of dollars in loans.
No matter how you look at it, when lending or borrowing money from a friend, it is always beneficial for you to get the loan in writing, and for that documentation to be as official as possible -- not out of coldness or callousness toward your friend or relative, but because the alternative is for the money itself to become wrapped up in your relationship.
Loan documentation websites, like LoanWell, can help make this process quick, easy, and painless. And when you’re done, you’ll have the peace of mind of knowing that no matter what, your relationship with your friend or family member will have the space it needs to continue growing stronger and stronger, far away from the question of who owes money to whom.