Why is it better to just give a friend or family member money rather than loan it to them?
Lending money can damage relationships with your friend and family, especially if they might have trouble paying it back. This emotional damage can often feel worse than losing the money.
Advantages of raising finance from friends or family
will be flexible - on a practical level, they may offer loans without security or accept less security than banks. may lend funds interest-free or at a low rate.
Inability to pay during their time of crises
If the friend you borrowed from is ever in need of money, you could be faced with the situation of being unable to help them in return. It's quite possible for your friend or relative to have an unexpected financial crisis of their own soon after they lend you money.
Final answer: Borrowing money from friends or family can provide the benefit of more flexible repayment terms based on personal relationships, unlike a more rigid bank loan structure.
Lack of documentation.
Many times, when we loan money to friends or family, we don't bother to document it in writing. This makes it very easy for miscommunication to arise regarding the terms agreed to verbally. You can minimize this though by easily documenting the personal loan.
Potential misunderstandings
As with any agreement, there are bound to be misunderstandings. Issues involving money can be especially tricky. A family member who agrees to lending money may find they need their money back before the agreed-upon time, or you may have difficulties paying the loan off on time.
Loans are not very flexible - you could be paying interest on funds you're not using. You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems. In some cases, loans are secured against the assets of the business or your personal possessions, eg your home.
Each year, you can gift anyone $18,000 with no gift or estate tax consequences. If you give over that amount, you will need to file a gift tax return and use a portion of your gift and estate tax exemption amount ($13.61 million per person in 2024).
- Pro: Potentially no interest to pay back. ...
- Con: You could harm your relationship with your loved one. ...
- Pro: Dad might choose to overlook a late payment or two. ...
- Con: You could end up putting someone you care about in a tight spot. ...
- Pro: No credit check. ...
- Con: No credit reporting.
Friends can give us love, moral support and care, which truly money can never buy. It is said that “a friend in need is a friend indeed”. More friends if unite they can earn lot of money, but money cannot buy true friends.
What is the biggest disadvantage of borrowing money from a family member?
Cons. Potential for conflict: If the loan isn't repaid or the terms of the agreement are broken, it can strain a relationship. The family member or friend loaning the money must consider the chances of not getting it back and whether the loan will impact their own financial goals.
Just say no, and stick to that one simple and final answer. DON'T EXPLAIN OR MAKE EXCUSES. When you say no, don't offer explanations or excuses. Doing so only opens the door to a discussion and prompts your friend or family member to try to overcome your objections.
- Listen to their story. When someone asks you for money, start by listening and offering empathy. ...
- Communicate clearly and politely. ...
- Stay calm and hold your boundaries. ...
- Offer help in other ways. ...
- Define your terms. ...
- Include giving in your budget.
On the borrower's side, there are typically no tax implications. The borrower doesn't typically need to report the loan and won't pay any income tax on it. In some cases, the borrower may get a tax perk from borrowing money from family. This is only the case if the borrowed money is used to purchase a home.
Boost your happiness and reduce your stress. Improve your self-confidence and self-worth. Help you cope with traumas, such as divorce, serious illness, job loss or the death of a loved one. Encourage you to change or avoid unhealthy lifestyle habits, such as excessive drinking or lack of exercise.
Key Takeaways. Lending money to friends and family can lead to financial problems for you and potentially cause relationship damage. Creating boundaries for loans to friends and family can help preserve relationships and minimize the potential for problems.
Family members are often the best choice for helping you with an unexpected expense. Asking will always feel a little awkward, but to make it easier, be honest about why you need the money. Sit down and have a serious discussion with your family about how much money you'll need and how you'll pay it back.
The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate.
Show deference and gratitude toward the friend who is being generous enough to offer you assistance, and you'll reduce the risk of bitterness later. Be clear about the amount of money you need, but present a range of loan options, and take what they offer (or leave it).
- Just Look at the Interest Rate. Comparing loans is about more than searching for the lowest interest rate you can get. ...
- Go Overboard With Consumer Debt. ...
- Never Be Late. ...
- Throw Good Money After Bad. ...
- Borrow More Than You Need.
What to avoid when borrowing money?
- Borrowing money you cannot afford to pay back. If you aren't 100% sure you can make payments on a loan you're thinking of taking out, just say no to borrowing. ...
- Borrowing money at too high of an interest rate. ...
- Taking out a loan you don't fully understand.
- Debt Accumulation: One of the primary dangers of borrowing money is the risk of accumulating debt. ...
- High Interest Rates: Many loans, especially those that are easy to acquire, often come with high interest rates.
The basic gift tax exclusion or exemption is the amount you can give each year to one person and not worry about being taxed. The gift tax exclusion limit for 2023 was $17,000, and for 2024 it's $18,000. That means anything you give under that amount is not taxable and does not have to be reported to the IRS.
Determining the appropriate amount of money for the guest of honor relates to how close your relationship is with them. The following cash amounts are generally acceptable: $20 to $25 for a co-worker or acquaintance, $50 for a close friend and upwards of $100 for a family member.
Giving cash is the easiest and most straightforward way to accomplish gifting money to family members. You can write a check, wire money, transfer between bank accounts, or even give actual cash.
