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6 Reasons Why You Should Never Take A Loan From Family And Friends

There are different goals and requirements during different phases in our lives. Some we are prepared for and some we are not. We usually plan for commonly thought of situations. We invest in a life insurance policy to take care of the family after we are gone. Or invest in stocks, mutual funds, real estate, gold, etc for our children or for our retirement. We anticipate the time when these funds would be needed and thus, plan accordingly. But not everything goes as per plan always and we find ourselves in a financial crunch sometimes. It could be for a medical emergency, children’s education, a family wedding, or funding for business purposes. To get out of such a situation, we want to reach out to our family and friends for a loan. Asking for a small loan from our inner circle is our instinctive action. However, borrowing money from family rather than from a financial lender, whether it is a no-interest or low-interest loan, has its pitfalls.

The interest rates for personal loans are higher than secured loans such as gold loans. However, do not let the process deter you. When you take out a loan from a lender you are aware of the exact terms and conditions. You know about your loan eligibility, applicable interest rates, tenure, repayment options, penalties on defaults, etc. With options such as instant personal loans, digital gold loans, and doorstep loan services, you don’t need to risk a personal relationship. Thus, it is always better to keep your money matters separate from your family and friends.

Things to Consider Before Borrowing Money

Whether you decide to borrow money from a lender or ask for a small loan from family or friends, do ask yourself these questions. The answers will give you much-needed clarity on which route to take.

  • Do I absolutely need this loan? Can I liquidate some of my assets or cut down expenses?
  • How much money do I need? Will it be a short-term or long-term loan?
  • Do I want to get a secured low-interest loan? What asset am I willing to pledge as collateral?
  • Am I willing to serve an unsecured high-interest loan from a lender, without any collateral?
  • What are my options for both secured and unsecured loans?
  • In case I am unable to repay my loan, do I have someone or something to fall back upon?
  • Can I risk straining a personal relationship for a small loan from my family members?

Based on the above, the questions of why, what, how, and when of borrowing money get answered automatically.

6 Disadvantages of Borrowing Money from family and Friends

If you have decided that taking a loan from family or friends is the best way forward, you should be aware of its disadvantages and consequences.

  • Lack of Clarity: When you borrow money from friends and family, most of the time, only the money part is discussed. The interest part (if any), repayment terms, tenure, etc are hardly discussed. The absence of any legal documentation could create a lot of ambiguity.

  • Awkwardness: Let’s face it, no matter how close a family member or friend is, it is always awkward asking for even a small loan. This might require divulging the reason behind the loan which you may or may not want.

  • No Legal Protection: In the absence of a written contract between you and the person lending the money, you do not have a legal safety net. If the other person retracts from his/her commitment of loaning you the money or changes the repayment terms, you cannot do anything about it.

  • Feeling of Indebtedness: Whether it is a small loan or a large one, once you have taken money from a close one, you feel indebted to them. This could also make family get-togethers difficult and uncomfortable.

  • Strained Relationship: If you are unable to repay the family/ friend loan, it could cause friction and strain in an otherwise close relationship. You could also become callous or casual in repaying the person on time. Owing money can affect the best of relationships.

  • Risk of non-payment in their financial crisis: The way they helped you out when you needed money, they would expect the same in their time of financial trouble. If for some reason, you are unable to fulfill that obligation and expectation, they may discuss it with other family members. And that is not a pleasant situation to be in.

Alternatives to getting a Loan from Family or Friends

Although there are many disadvantages to getting a loan from family or friends, there are many alternatives too!

  • Unsecured Loans: You can apply for an instant personal loan or credit card from a bank or NBFC like Muthoot finance. Since these are unsecured loans, the interest rates are higher than secured ones.

  • Secured Loans: In these, you are required to pledge an asset as collateral against the funding. Gold Loans, Loan Against Property, Loan Against Shares, etc are examples of secured loans. Gold loans are one of the quickest and safest ways to secure funding for financial exigency.

Borrowing money from friends and family might seem like a convenient option, but it comes with quite a few problems. Why risk a beautiful relationship when there are multiple other choices available?

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