You’ve probably heard a story or two about the strain caused in friendships or families because someone borrowed money and failed to pay it back.
There’s no right or wrong way to borrow money from loved ones, but going this route involves more emotional baggage and can make the process more complicated than turning to a bank and getting a personal loan. Here’s why navigating this landscape can be tricky.
Downsides to borrowing from Bank of Family
When you borrow money from a bank or financial institution and pay it back, you have set loan terms. Since Bank of Family isn’t a financial institution, figuring out the details around the loan, such as how much interest to charge (if any), can get awkward.
Also, when you borrow money from a bank or lender, the interest rate and approval process is largely based on your creditworthiness. When the loan is paid off, the transaction and payment history is reflected on your credit report.
When you borrow money from a family member, you forgo this potential credit-building aspect of your finances.
Other issues that may arise if you borrow money from family or friends:
- Confusion over repayment length;
- Late payments (what happens if you pay late?); and
- Tax implications if the amount borrowed is more than $15,000.
The good news is that there are other options you can turn to, such as personal loans.
Why personal loans are worth considering
Personal loans are loans that can be used for just about anything. They may be used to consolidate high-interest debt or finance large expenses like weddings.
Personal loan interest rates are generally not as high as credit cards and may range from 6% to 36%. In order to qualify for the lowest rates, you need to have a good credit score.
With a personal loan, the transaction gets reported to the credit bureaus, so your credit score may improve. Conversely, if you miss a payment or make late payments, it may negatively affect your credit score.
How do personal loans work?
You can apply for a personal loan through many established online lenders. In many cases, the whole process can be completed online, including applying for the loan and signing an agreement.
Digital lenders make it fast and can even fund your account the next day, depending on your financial standing and other qualifications.
In addition to your creditworthiness, some online lenders will consider your education and work experience when reviewing your application. Some digital lenders use artificial intelligence and machine learning that take both traditional and alternative data into account to determine your ability to repay a loan. This may be helpful if you’re still in the process of building your credit.
What else you should know about personal loans:
- You make fixed monthly payments for your term (number of months of repayment);
- Terms are usually between two and five years;
- There are typically no penalties for paying the loan off early; and
- You’ll likely have a fixed interest rate.
Advantages of getting a loan from a bank or lender
A lender from a financial institution can save you the time, effort, and awkwardness of having to figure out the details of the transaction with your family.
You’ll be able to easily:
- Handle the logistics of payment and set up automatic transfers between accounts;
- Have your transaction reported to the credit bureaus; and
- Receive tax documents (if needed).
Shop around for the lowest rates
The personal loan landscape is a competitive one, and you have plenty of options. This means you should research and shop around for the lowest rates and best terms.
When you’re in need of money, turning to family or friends for a loan may seem like an easy option. However, even if you have the best intentions to pay it back quickly, involving money may add an unnecessary and complicated layer to your relationship. Why risk it? Turn to an established lender for a personal loan and avoid jeopardizing your relationships.