10 Pitfalls of Getting a Loan from a Relative
Posted December 15th, 2011
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Have you ever been in a position where cash is so tight that you need a loan to keep yourself afloat? You will probably be in such a place one day even if you have not been there already. When you do get there, you may be strongly tempted to borrow money from a relative because you think your family will offer generous loan terms. However, you should think twice before asking a relative for a loan. In fact, there are ten major pitfalls when it comes to getting a loan from a relative.
- Sibling Rivalry — Think again if you believe that you have outgrown sibling rivalry. If you borrow money from your parents, you may provoke strong feelings of jealousy from your siblings, especially if they have never borrowed money from mom and dad. Bankrate.com warns those who want to borrow money from their parents that siblings often believe their parents are playing favorites when their parents lend money to their brothers and sisters.
- Hidden Strings — Relatives may say there are “no strings attached” when they lend you money, but such is rarely the case. The lender may expect you to be at his or her beck and call as long as you owe money to him or her. You will at least feel like you cannot turn down a request for help from the relative to whom you owe money.
- Misunderstandings May Abound — When borrowing money from a relative, the line between a gift and a loan can be easily blurred. You may think of it more as a gift even if an agreement is drawn up. This may make you less inclined to repay it. Your relative may not demand a formal loan agreement. This will increase misunderstandings and even cause your lender to resent you if he or she sees you at family gatherings and you still owe money.
- Added Pressures — Business Week notes that small business owners who borrow money from relatives face many extra pressures in addition to the demands of starting a business. If you have never run your own business before, do not borrow money from relatives for your company unless you have exhausted all other lending options.
- Awkwardness — Family gatherings can be awkward enough, but the discomfort you feel around oddball relatives will increase if you have turned to them for a loan.
- Loss of Relationship — Despite good intentions, you may find yourself unable to pay off a loan. If you have borrowed money from a bank or other creditor, filing for bankruptcy can help you if you are completely unable to repay your loan. But if you borrow from a relative, you might lose the relationship forever if you cannot give the money back to your lender. At the very least, this possibility must be discussed when you ask for a loan. That way, you can take steps to avoid it.
- Loss of Reputation — Those who borrow money from their in-laws risk losing whatever esteem they might have in the eyes of these relatives. You are probably not good enough to be the spouse of their child anyway, and asking them for money will only confirm their suspicions. You may also find out the real meaning of the term monster-in-law if you borrow money from one or both of your spouse’s parents.
- Business Interference — The small business advice section of Chron.com notes that many family members who lend money to relatives for a small business will feel like stakeholders and try to interfere with the company’s operations. That can prove disastrous.
- Gossip — You might think borrowing money from a relative is a private affair. Unless your relative is exceptionally good at keeping a secret, however, the whole family will probably find out about your loan even if you do not want that to happen.
- Financial Hardship for the Lender — Relatives are unlikely to turn down your loan request even if they lack the money to fulfill it. Therefore, you may inadvertently cause relatives financial hardship if you borrow money from them.
Borrowing money from a family member will bring out his or her true colors, which may be ugly.