When your once little nephew Johnny approaches you with his latest hare brained scheme on how to make some extra bucks, and you realise his math skills have not improved since high school twenty years ago, say no to a loan. Little Johnny should have known better than to ask and put you in such an embarrassing situation, potentially causing a family rift with his parents. Point him in the direction of the nearest bank and explain if he’s too risky for them he’s certainly too risky for you.
Borrowing money from family members is fraught with hazards and really isn’t recommended unless the family member is offering unasked to help you out. If your own credit isn’t good enough to obtain a loan from an established lending institute then you are potentially jeopardizing your relative’s money, which they may not be able to afford to lend you in the first place.
Even if the family member has available funds to spare you could end up being under their control if you borrow money from them. Imagine the weekly phone call demanding you pop round with that week’s payment and being obliged to attend the ritual family dinner you’ve spent the last five years making excuses to avoid.
Perhaps you don’t live close enough to be caught in that position but there will be no escaping the phone calls where you are expected to account for all your frivolous expenditure in the last week, and explain why you thought it was necessary to take the bus when you could have walked the five miles to work and saved on the ridiculous waste of money. Expect to be questioned as to why you insist on paying a hairdresser when it is perfectly possibly to style your own hair with a pair of kitchen scissors.
It is never a good idea to combine business with family unless it is of course a family business. As Al Korn of SCORE says “a banker will send you a nasty letter. A relative will remind you every time they see you.” Asking for a loan to help with your business could lead to unwelcome advice on how to run the said business, so don’t ask if you don’t want to be told.
It isn’t a good idea to ask to borrow from relatives when it’s a gossipy clan, and siblings, cousins, and other family members find out about your monetary situation. Jealousies could be stirred and fights started, with them each queuing up in turn to borrow from your lender.
Borrowing money from relatives should never be considered if you or they are not aware of the tax implications. If you borrow more than $10,000 interest free your relative will end up paying tax on the amount of interest the IRS assumes they are receiving. It would be far better all round if you could simply persuade a relative to give you a tax free gift of up to $13,000, rather than enter into the complex tax issues which can arise from a loan. If you receive the money as a gift then you won’t need to worry about repaying it, or them issuing court proceedings against you if you fail to repay.
Unless you are very young and still reliant on your parents it really is never a good idea to ask a relative to lend you money. Instead you should learn financial independence and improve your credit score so that you can borrow from the bank instead of embarrassing your relatives by putting them in a hot spot.