5 Reasons You Should Never Borrow Money From Family Members

It’s no secret that banks are making it harder and harder to borrow money. In fact, it’s become almost impossible for people with less-than-perfect credit to take out loans for even small purchases, including home appliances. Larger loans, for necessities like cars and houses, are basically just out of reach for these people. If you’re in this boat, you might be eyeing your more well-off family members, wondering if you can tap them for a few extra bucks until things start going your way once more.

Borrowing from family can seem like an incredibly attractive option, as the loans come with no paperwork and credit checks, you won’t be penalized with debt collection calls if you don’t pay back the dough. You might not even have to pay interest. Bonus! However, there are plenty of reasons why borrowing money from the family is a bad idea. Here are just 5 of those reasons.

1. You’ll be scrutinized.

You might be used to talking about your life and showing off your purchases with family members and in fact, you probably shared all kinds of details with your family that you would never share with your banker. However, once you accept a loan, your family member becomes a banker. Talk of a promotion at work becomes questions about your loan payments. That pretty coat you just bought becomes a red flag that you’re not taking your debts seriously. Family functions become minefields, when money is standing in the way of open communication.

2. Loans between family members may come with strings.

Taking a loan from a family member pretty much entitles them to a lot authority over your life.  They may request that you avoid activities that they think may hinder your ability to pay them.

They’ll wonder why you’re on vacation when you should be working/making money.

They may ask that you take a money management course.

They may ask that you create and stick to a strict budget.

They may require collateral for the money they are lending you.

All these things will most likely make you feel like a failure and inadequate when you’re around them. Suddenly, you’re no better off than you would be if you gat a high interest loan the bank or a payday lender. And think about the tension at all those family gatherings.

3. The terms are unclear.

Loans that come with no strings can also be complicated, but in an entirely different way. You might think you have months, or even years, to pay back the loan, but the person who loaned the money might expect it right back the next month. Who is right? It’s impossible to know. These little questions could land you in small claims court.

Consider these options to make things a little clearer with the family lender:

  • Setting up a payment schedule
  • What happens when a payment is missed?
  • Securing the loan

4. There could be tax implications.

The IRS likes to make sure that everyone is playing by the rules and paying back a tithe on the money they make. If your loan is truly a loan, and the family members charge you interest on that loan, the interest payments are taxable. If you’re borrowing a lot of money, which you might do if you are buying a car or making a real estate down payment, the interest payments can become major paperwork headaches.

You’ll need to disclose how much you paid in interest, and the family member will need to disclose how much was received. Lawyers and accountants might be needed, just to sort the whole mess out, and this could eat up any possible savings you might have. Find out more about taxes, and how to pay them, by clicking here.

5. You didn’t learn anything.

It’s sad, but if you can’t borrow money from a traditional source, you probably need a little help in fixing your credit and learning how to manage money in an appropriate way. Taking a class, working with a credit counselor or sitting down with your bank and pulling together an action plan could help you learn these lessons. Visiting the Bank of Grandma will not.

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