A study conducted by Bradford & Bingley in Britain, indicated more than 50 percent of the people surveyed have borrowed money from family and friends. Of this, only five percent who had borrowed money from family and friends said they did not have any qualms asking for loans and twelve percent said they felt embarrassed doing so. And only 30 percent said they prioritized paying bank the loan to family and friends, while the rest gave priority to financial institutions.
Even though the study was conducted in Britain instead of Malaysia, its findings, are reflective of our own social conduct when it comes to borrowing money from family and friends. The majority of us do find it difficult to ask money from family and friends. This is because we do not want to risk putting our relationship in jeopardy over a loan, and partly because we do not want them to know that we are in a financial mess.
But strangely, once the loan from a family member is secured, most of us do not have the urgency to pay back the money borrowed, creating unnecessary bad feelings in the lender. Undoubtedly, borrowing money from family and friends is often the first or last resort, depending on one’s situation and personal preference. And like any other forms
of debt, borrowing from family and friends has its own pros and cons.
PROS
- Less Documentation – Unlike financial institutions, borrowing money from family and friends does not require you to submit salary slips and application form. Thus, reducing the amount of documentation needed.
- Faster “Processing” Time – Financial institutions would normally take between one to two weeks to process and disburse the money to the borrowers. But with family and friends, the whole process can take place on the same day.
- Low or No Interest – The most interesting part of borrowing from family and friends is that they do not expect to be paid interest on the amount of money loaned to you. Even if they do, the interest charged is normally lower than the market rate.
CONS
- It creates personal and emotional issues – This is the real risk in borrowing money from family and friends. Misunderstandings may arise, especially when you fail to repay the loan and the fact that you will see them during celebrations or other social events can create a strain on the relationship.
- Reduces chance to build credit rating – If you have limited credit histories, you may miss out on the chance to build your credit rating with financial institutions when you borrow money from family and friends.
In order to avoid these problems, it is best to approach this issue with caution. So, before asking for a loan from family and friends, you should ask yourselves:
- Do i really need the money and is it for a valid reason?
- Will i be able to pay back the loan? How long will it take me to do so? Where will i get the money?
- Can your family or friend afford to lend you money?
- Will it have and adverse effect on the lender if you default? Or would it cause financial hardship for the lender?
Answering these questions will help you determine whether the person whom you intend to ask the money from can afford to help you. This is because sometimes the perception we have of someone being wealthier than we are is not true. The fact that your uncle has a weekend home and a brand new car does not necessarily mean he has lots of cash to spare.
Indeed, borrowing money from family and friends can be tricky. This article is not to encourage borrowing money for quick financial solution but more on educating people to treat money with accountability and responsibility.
To avoid the emotional strain on the relationship, you need to be totally honest and upfront about the situation. If you fail to do so, you could lose the support of the people who are important to you as well as their friendship, which could mean more harm to you than the sum you borrowed in the first place.
