Parents, well-off uncles and aunts, older siblings - it seems like a great idea to ask them for money when you need it, rather than paying high interest rates with a bank or other financial services provider.
But family loans can go horribly wrong.
“We borrowed money from an uncle to put down a deposit on our townhouse. We made a verbal agreement that we would start to pay back the loaned amount a year after moving in, as we knew we would need a bit of grace - moving house can be expensive.
"Now he’s changed his mind and wants us to start paying immediately. We simply can’t – to comply would mean selling the townhouse in a bad market; we would incur all sorts of losses.
"Even worse, my mother is now not talking to her brother, and the whole family is taking sides.”
Make it work
This doesn’t mean taking a loan from a family member is a no-no, just that you have to be careful and thoughtful when you do so.
1. Bear in mind that a loan can change the power dynamics in a family. If, for example, you borrow money from a sibling, that sibling could take this as implicit permission to ‘guide’ your life, asking questions about what you’re spending money on or suggesting ways to cut down.
So don’t borrow money from someone with whom you have any emotional baggage.
2. Before approaching the family member you want to borrow from, draw up a plan that shows how much you want to borrow, what kind of interest you can afford to pay, and over what period you plan to repay the loan.
You want to show that you seriously intend to repay the loan and don’t just want to take advantage of a family member’s affection.
3. Sit down and talk it through with the person. Adjust your plans if they have any concerns or issues.
4. Draw up a written agreement, just in case there are arguments or misunderstandings in future.
5. If you ever encounter difficulties and can’t make a payment, discuss it with your family creditor, and make a plan to catch up.