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9 tips on how to borrow money from family

Allie Johnson

February 19, 2015

Want a family member or friend to bail you out of a financial pinch? Think carefully before you ask your mom, your best friend or your rich great aunt for a loan.

Turning your loved one into a lender should be a last resort, says Kelley Long, a certified public accountant and member of the American Institute of CPAs' National CPA Financial Literacy Commission.

“Borrowing money from family and friends is risky business,” Long says. “It's a really easy way to mess up relationships.”

Before you even go there, think through all of the ways taking a loan could affect your relationship — from awkwardness to estrangement, says Luke Landes, founder of the consumer website ConsmerismCommentary.com, who borrowed money from his dad to buy a car (and paid it back early).

Before borrowing from someone you love, look at other options, such as taking on a second weekend job or selling unneeded items.

If you do decide to ask for a loan, make sure you pick the right person — one who can comfortably afford to help you, Landes says.

And, finally, use a businesslike manner when asking for the loan, Long says. Here are nine tips on how to approach friends or family for money:

1. Create a proposal. Figure out how much you need to borrow, what interest rate to propose, and how much you can afford to repay each month. Then, plug those numbers into an online amortization table to create a proposed repayment schedule, Long recommends. Thinking through these details at the outset will show your potential lender you're serious about paying back the money, she says.

2. Set up a meeting. Don't just hit up your friend or family member for cash while you're hanging out together at the bar, the beach or a family gathering. The best way to talk about money, and avoid hard feelings or fights, is to prearrange a time for a discussion. “Treat it like a quick business meeting,” Long says.

“It can be really easy to fall back on the woe-is-me plea, but that's not the best approach.”
–Kelley Long, CPA

3. Take a calm approach. “It can be really easy to fall back on the woe-is-me plea, but that's not the best approach,” Long says. “Don't beg.” Instead, make the request in a matter-of-fact, unemotional manner, she recommends. Depending on who you're asking, you might have to sit through a speech about financial responsibility, Long says. “Let them say their piece in order to feel better about the situation,” she says.

4. Be willing to share details. Before agreeing to a loan, your relative or pal might have questions. They probably will want to know exactly what caused your current financial difficulty and why you need the money, Landes says. Take time to calmly and honestly explain your situation, but ask them to keep the information confidential, Long says. Also, explain how you will do things differently in the future if necessary. Come up with a detailed, workable budget and share a plan to begin saving.

5. Don't haggle over interest. A very low interest rate of 1 or 2 percent is enough to make the transaction a loan, rather than a gift, in the eyes of the IRS, Long says. If you fail to repay your loan, the person who lent you the money can declare the outstanding balance as a loss on her taxes, she says. However, the lender should have the final say on the interest rate, Landes says. “Don't try to talk them down,” he says.

6. Propose consequences for late payments. Discuss a late fee and when it applies, as well as an interest rate increase if you're late a certain number of times, Long says. It's also a good idea to talk about what would happen if an unexpected crisis, such as an accident, illness or job loss, left you unable to repay the loan.

7. Offer to put up collateral. Do you have a ring, an antique or a big-screen TV you could offer to secure the loan? “Be willing to put something of your own on the line,” Long says. For example, a friend of hers lent money to a boyfriend, who put up his art collection as collateral. When the borrowing beau defaulted, Long's friend got her money back by selling the paintings.

8. Head off scrutiny of splurges. One problem with getting a loan from a loved one is that your lender might judge your subsequent spending, Landes says. You don't want your Aunt Martha griping that you just got a pedicure after she lent you money for a car repair. Be proactive: Share your budget and point out where you've cut back, Long says. “Then say, 'You'll notice I have some money built in to treat myself occasionally, just like everyone does,'” says Long.

9. Promise to put it in writing. “I don't care if person says, 'No, I love you, I trust you,'” Long says. “You've got to put it in writing.” Recording the agreement does three things, she says. First, it provides proof that you're serious about repayment, which helps to preserve your relationship. Second, it gives you documentation to refer back to in case of a dispute over terms. Third, the contract provides proof of the loan for the lender's income taxes if you don't repay the money. In many cases, you can use a simple promissory note, which you can find online, she says.

Once you've signed the documents, do everything in your power to fulfill your part of the deal, says Landes.

“You want to go into this planning to pay it back quickly,” Landes says.