Borrowing money can help you start a business, pay off debt, fund the down payment on a house or help put children through university. While many people turn to credit agencies, banks and other institutions to borrow money, you might consider the option of borrowing money from friends and family. This option certainly has its drawbacks, but the advantages of borrowing money from loved ones may counteract the potential downsides.
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One advantage of borrowing money from friends and family lies in its relative speed compared to borrowing from traditional lending institutions. Borrowing money to buy a car or start a business can take weeks or months when going through a bank; friends and family members may be willing to write a cheque on the spot, depending on the level of urgency involved or how much money you're requesting. Friends and family members can also easily pick up the phone to request an immediate bank transfer, with loans landing in your account just a few hours later.
When borrowing money from banks and other groups, you'll typically have to show volumes of documentation to prove your credit worthiness. This may involve collecting old bank statements, cheque book stubs, tax returns, pay slips and even divorce papers or bankruptcy documents. Reference checks, multiple meetings with loan advisers and other hoops can make the process quite lengthy. An advantage to borrowing money from friends and family members is that the process is less complex. Since they know and trust you, you'll have less to prove before borrowing can still take place. It's still recommended that you draw up a basic contract with a repayment plan to avoid future disagreement over loan terms.
Another advantage to borrowing money from friends and family is that you'll likely pay lower interest rates and processing fees, making it cheaper and quicker to pay back the loan. Payments will apply to the capital much faster with lower interest rates, and some friends and family members may decide not to charge interest at all. Whatever interest rates are agreed on, take care to clearly specify this in the loan contract to avoid discord.
Friends and family may take pride in loaning you money for a worthy pursuit, such as starting a business, attending university or helping pay for a talented grandchild's piano lessons. This sense of altruism is another advantage to borrowing money from loved ones; they'll feel invested in your future success and will enjoy having played a key part in helping you achieve your dreams. Remember that whatever their good intention, however, a loan is a loan: you must pay it back, and according to the terms under which it was given. Many relationships have been damaged because of unpaid loans so don't let this happen with your friends and family.
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