Sometimes you just run out with cash. Oftentimes this happens to those employed individuals who depend on paydays for income and do not have sufficient savings. Time comes when you find yourself in a position where the most viable option you have is to borrow from friends and family. While this method of getting cash seems like a reasonable solution, it comes with both benefits and drawbacks that you should consider before approaching a close friend or a relative.
Benefits of Borrowing Money from Friends and Family
1. Low or even No-Interest Rate
One of the most important benefits of borrowing money from friends and family is the fact that you don’t usually have to pay high interest fees, compared to a loan, such as a payday cash advance. In some cases your friend or a family member may offer you the money at a very low or no-interest rate. Also, instead of charging compounded interest (this is the interest charged on both principal and interest), borrowing money from friends and family members is based on a simple interest calculation (based on principal only).
2. Simpler Transaction
Another benefit of borrowing money from friends and family is that you don’t have to worry about a long and complicated loan application and approval process. In order to apply loans from a bank, you must fill out a long form detailing all of your finances and wait hours or even weeks to get an approval. However, borrowing money from someone you know (friends and family), is as simple as asking, waiting for a yes, and signing a promissory agreement to make things official.
Drawbacks of Borrowing Money from Friends and Family
1. No Credit Reporting
When you get a loan from a bank or a payday cash advance lender, your payments may be reported and recorded on your payment history. If you make timely payments and pay off the loan as agreed, this will help boost your credit score. Also, a mix of different types of credit accounts, including loan accounts, can positively affect your credit score. But if you are borrowing money from a friend or a family member, that information will not be reported to credit bureaus.
2. Relationships and Reputation are At Greater Risk
Getting a loan from a bank or applying with a payday cash advance lenders is risky, especially if you fail to pay on time. Similarly, one of the greatest drawbacks of borrowing money from friends and family members is that if you default on your payment, your financial reputation is not the only issue at stake, but also your relationship and close ties with them. If you cannot repay the borrowed amount as promised, it can lead to mistrust and conflict issues between friends and family members.
Borrowing money can help you start a business venture, pay off overdue bills and other cash obligations, and even fund your children’s college education. While many people turn to credit unions, banks and payday cash advance lenders to borrow money, many still consider the option of borrowing money from friends and family. This option certainly has its benefits, but the drawbacks may counteract the potential benefits, such as risking good relationships and close ties. Before borrowing money from friends and family, make sure you can handle the debt responsibly.