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How to Get a Loan from Your Friends or Family

Written by Neal Frankle - 10 Comments

How to Get a Loan from Your Friends or Family

Even if you’ve been less than stellar with your finances in the past, you can still borrow money that you might need from family or friends. This is especially important if you currently pay high interest rates and want to refinance at a lower rate. If that describes you, your friends and family are a great alternative to things like credit card debt.

The first step is to be absolutely clear on how much money you need, why you need to borrow the money, and (most important) how you’re going to repay the loan.

You’d think that most people know exactly how much money they need, but that’s not always the case. Tim, a young man I know, recently went to his brother so he could realize the full value of his college education – by completing it. He asked his brother for $5k to cover his upcoming tuition payment. But when they looked at the issue more carefully, they realized that $5k was only the tip of the iceberg.

Tim would need money for room and board and books a few months after his tuition was due. It would have been difficult for Tim to keep going back to his brother for more money because he’d lose credibility.

It’s far better to be clear on your objective and think about the total costs you’re going to incur. Then add 10% (at least) before you go looking to borrow money. This way you won’t have to go back to the well.

And while we’re talking about steps you need to take before you ask anyone for a loan, make sure you hammer out a solid repayment plan. If you don’t have a plan on exactly how and when you’re going to repay your debt, get one. If it includes looking for a second job, go get the job. If it includes selling your junk on eBay, start listing your items. Whatever you do, don’t ask anyone for financial support unless and until you have a solid plan for how you’re going to repay the money.

This step is as much for you as it is for the potential lender. I say this because it’s important you have self-confidence when you approach people. Your repayment plan will give you that self-confidence. It has to spell out exactly how much money you’ll be paying and how often. Don’t promise anything you can’t live up to, but make sure you do whatever you have to do in order to come up with a solid plan.

Once you’ve come up with your plan, it’s time to list the people you think might be interested in doing business with you. Jot down their names and what interest they may have in loaning you money. Those interests probably include helping you out, getting their money back and making some interest. Are there any other motivations this person has? What are they? List them and next to those motivations note how this loan gives them what they want.

Write out how this loan is going to help you. How the loan will make a difference in your life. Next, detail how you’re going to repay the loan so they feel confident they’ll get their money back. Finally, make sure to insist they get a good return on their money. This way they’ll consider it an investment rather than charity.

There is a reason you should write this out before the meeting rather than winging it. By reducing your thoughts to writing, you’ll be ingesting it and making the plan a part of you. Also, when you meet with potential investors, show them what you wrote down. It demonstrates that you are taking this seriously, and that will instill confidence that you’re going to stick with your plan to repay the loan.

Approach each person one at a time. Do not have an expectation that they’ll automatically lend you the money, and don’t resent them if they turn you down. It doesn’t mean they don’t care for you. Just go to the next person on your list. (That’s another reason why you created a list of potential lenders.)

Of course, if all this seems like too much work, there are plenty of ways to borrow money without going through this process. They are simpler and less stressful, but potentially more expensive. They include taking out a bank loan, peer lending, cash advances, and payday loans. These may not be particularly attractive ideas, but they’re relatively easy.

You can and should give your friends and family the opportunity to invest in you. If you show them how much you’ve put into this process, the chances are high that they’ll be willing and eager to do so.

Published on April 28th, 2011
Modified on April 5th, 2012 - 10 Comments
Filed under: Debt Reduction

About the author: is a Certified Financial Planner in Los Angeles whose goal is to help people improve their finances and find balance in life. He covers these topics at his personal blog Wealth Pilgrim.

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10 Responses to “How to Get a Loan from Your Friends or Family”

  1. 1
    Newlyfrugal Says:

    It is a BAD idea to ask friends and family for loans. You are putting them on the spot. If they say NO, your relationship will be changed. If they say YES and you default/make late payments, your relationship will be changed. Believe me, your friends/family do NOT welcome the opportunity to “invest” in you financially.

    If you need a loan, go to Lending Club. Better yet, earn your own money little by little, put it in a Rewards Checking Account that pays 3 to 4% interest, and don’t buy something (car, appliance, tuition, etc.) unless you can pay for it. Establish an emergency fund so you never need a loan from family/friends.

    For college tuition, books, room and board, you can get student loans and scholarships. I know because all four kids in my family graduated from college and graduate/professional school with student loans, scholarships, part time work, and minimal help from our parents. None of us had to ask relatives for $5k to cover tuition, books, etc. Our relatives did not have $1k for their own bills, so why impose on them for our debts? The financial aid office in every college has staff who will help you find ways to get funding without using credit cards.

    If you are poor and cannot afford $50k tuition per year at a high end university, I suggest you start at a community college and live at home while you take classes.

  2. 2
    Mike B. Says:

    It’s not always realistic to say that people should just save and never borrow. We recently had repairs urgently needed on our house where the initial estimate was $12,000. Our emergency fund was only up to $5,000 at the time. We inventoried our options, and one that we considered was asking my father for an $8,000 loan.

    He was willing to loan us the money. We offered him the same interest rate that we would have paid at our third-choice option, but without the origination fees. We also slashed our budget to the bone and put together a six-month repayment plan for our proposal.

    Ultimately, we wound up being able to get the cost down to something we could manage, but the exercise was actually fairly useful.

  3. 3
    AAAMPblog Says:

    I have to agree with @NewlyFrugal. Asking family or friends for money should be a last resort. I like the saying “Before asking a friend for money, decide which you need most”.
    Ken Faulkenberry

  4. 4
    Kevin R. Says:

    I’d concur to never ask as a friend, as it is a quick way to end it. I might lend as a friend, but no more than I would be willing to write off as a gift.

    Family to me is different, they are kind of the ones we’ve been placed on this Earth with and we’re stuck with, unlike our friends. Any monetary exchange does open up the door for the leader to meddle in the debtor’s life (a bank is not interested in addressing moral discrepancies), so family has other interest other than fiscal. Then I’m one who rather deal with a outside impartial entity than the humility of dealing with family.

  5. 5
    Kevin R. Says:

    I should clarify, I don’t see any moral discrepancy in the example of the article, but Tim’s brother did meddle, for Tim’s benefit.

  6. 6
    Jacinta Says:

    Asking friends and family for a loan is a risky proposition. Most people will want to help you, but may resent feeling put on the spot by such a request. This means that they might say “yes” even though they’d prefer to say “no”. Or, if they do say no, they’re going to be concerned about the repercussions of doing so.

    This article suggests that the lender might like to make some interest on the loan, but doesn’t really suggest to the borrower that this is important. This is important. Paying interest on a loan has two advantages to the lender. One, they’re not losing money by investing in you and two, they know you have an extra incentive to repay (otherwise the interest will keep building up).

    The vast majority of personal loans I’ve heard about are considered to have the advantage to the borrower that they are interest free. I would recommend never approaching a friend or family member and asking for an interest free loan (at least for any loan that’s going to last more than a week). If they offer, that’s a different matter.

    With respect to interest, you should request that they consider a lower rate than you’d be paying in other circumstances, but not much lower (if at all) than what they’d be getting if you’d never asked. For example, if you’re borrowing to pay off a credit card that has an interest rate of 19%, and the money you’re borrowing from them has been sitting in a bank account that was earning only 2%, perhaps you could offer to pay them 2.5% or 3%; and also suggest that you’ll beat that bank account’s interest by 0.5 or 1% even if the banks increase the interest rate over time. At the least you should try to match the rate they’ve been getting.

    You should also discuss what should happen if you miss a payment, even though you don’t plan to, and what should happen if you default on this loan or if you declare bankruptcy. You must also discuss the terms of how the lender can cancel the loan for full repayment if they need the money.

    You should be upfront about the repayment order of your loans, for example, you should state that you have every intention of paying their loan first, or last, or in order of interest. They should know your intended duration of the loan, and should understand that you intend to pay off X, Y and Z before them; if that is the case.

    You should also be careful of taking on more debt once you have a loan with a family member or friend, and also of what you buy. If your lender sees you buying nice things and eating out all the time and going to the movies; but meanwhile you’re not making repayments, or they’re giving you a great deal on an interest free/low interest loan; they might feel that you are being disrespectful or unwise. Only borrow from friends or family if you can repay quickly, or if you are going to show that you are a good investment by living at least semi-frugally and mostly wisely. Certainly don’t be racking up more credit card debt with an outstanding personal loan to someone who can see (or hear about) your spending patterns.

    Finally, keep in mind that lending from family and friends doesn’t directly improve your credit score. This is fine if you just really need to dig yourself out of a hole, but if you do want to improve your credit score go with a bank.

  7. 7
    Newlyfrugal Says:

    Save yourself the time, trouble and headaches: don’t loan to friends/family and don’t ask them for a loan. Simple.

    IF a borrower will go through the hoops anyway to get your loan, let them go to Peer to Peer lending or to a bank. No headaches for anyone. Trust me. I know from experience.

  8. 8
    funds control Says:

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  9. 9
    Mr Eric Says:

    Good Day ,

    I got your mail. By my way of a proper introduction, I am Mr. Eric Johnson
    Snr. Director and CEO. I am a Legitimate and a Reputable loan Lender
    Located at Nigeria, Nig. I am a dynamic financial assistance. I loan funds
    out to individuals in need of financial assistance, that have a bad credit
    or in need of money to pay bills or to invest on business. I want to use
    this medium to inform you that we render reliable and beneficiary
    assistance as be glad to offer you a loan. Presently i own 45% of the
    shares in CGP(Capital Group PLC, London) a government approved Financial
    Institute. I am currently setting up a scheme in form of Loan acquisition
    to help various individuals as well as organizations who have intentions of
    renovating, debt consolidation, re-financing and also establishment of
    business outfits. I am an international business man and Lender that has
    offered Loans to so various individual and firms in Europe, Asia, Africa
    and other parts of the world. We give out our Loan in USD($) and GBP(£).

    I also provide Real Estate Loan access to Hard Money. We can fund
    quickly,Typically within 84 hours of receiving your application. Hard Money
    is available for adequately collateralize loans on single-family
    residential houses and other Real Property including commercial projects
    and private individual/home loans. The maximum loan term we can offer is 30
    Years at fixed interest rate of 3% per year.

    In regards to your mail, I want you to know that I can help you get this
    loan only if you are serious. But before we can proceed you are expected to
    inform us of the exact loan amount requested so as to enable us provide you
    with the Loan Terms and Conditions. Please, do complete the short
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    FILL THE BORROWER’S INFORMATION:
    Your Name:______________________
    Your Address:____________________
    Your Country:____________________
    Your Occupation:__________________
    Loan Amount Needed:______________
    Loan Duration:____________________
    Monthly Income:__________________
    Cell phone Number:________________
    Have you apply for online loan before______

    Email:ericjohnsonloanmanagement45@gmail.com.

    I await your swift response to this mail.

    (Regards)
    ERIC JOHNSON LOAN MANAGEMENT45 Inc.
    DIRECTOR/ CEO: Mr. ERIC
    LICENSE No: 98267
    Tel number: (+234)-705-33-18-338.
    ============================== ==============================
    ============================== ==============
    Warning from ERIC JOHNSON LOAN MANAGEMENT45. (E.J.L.M.)The information
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    FOR ALL RIGHTS RESERVED

  10. 10
    Kobe @ Finance Advice Says:

    Inter-Family Loans are certainly a great prospect for any member of the family whoâ??s seeking for a loan, the borrower and the lender both belong to the same family. The benefit of such loan is that interest cost remains in the family and the rates as compared to other sources would be quite low.

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