Should You Borrow Money from Family?When you’re looking to borrow money, one option stands out as somehow both fairly safe and incredibly risky: getting a loan from people you know. Your family and close friends can be great lenders, offering lower interest rates, more flexible repayment terms and more leniency than traditional financial institutions. On the other hand, taking out a loan from someone you’re close with can put a lot of strain on your relationship, especially if you can’t pay that loan back. Debt is often considered bad, but ruining a good relationship with a loved one can be even worse. In order to avoid conflict and find out whether a familiar loan is right for you, read on to find advice on the best ways to ask your family and friends for money, the drawbacks of doing so, as well as alternatives to explore if it doesn’t work out or you’d prefer not to borrow from family.

A family loan is still a loan

The best way to avoid hurt feelings over a loan from a family member is to treat it as seriously as a loan from a bank or online lender. Come prepared with a proposal explaining why you need to borrow money and exactly how much you’re looking for. To establish trust, be open about your finances and how you plan to pay your lender back, and don’t push for an immediate answer. Most lenders need time to process a loan, so give your family member a few days to think over your proposal and check their own finances.

If they agree to lend you money, draw up a contract and put the agreement on paper, establishing how much you’re borrowing, the length of the term and what your payment plan will look like. Go into as much detail as possible, and for large loans, consider paying an attorney to look over the contract and offering collateral to secure the loan. Additionally, even though your family member is probably lending you money out of love and not to get a return on investment, it’s still a great idea to attach a small amount of interest to the loan agreement. Paying a 1% to 2% interest rate will give your lender a small profit, and is still below standard interest rates for the vast majority of lending institutions. For loans above $14,000, which is 2017’s annual limit on tax-free gifts in the U.S., paying interest can also help your family member avoid trouble with the IRS. The IRS assumes a minimum amount of interest charged for all loans, even ones made to family, and requires you to report profits made from that interest as income.

Understand the downsides

While you may not have to worry about debt collectors when you borrow money from a family member, you do risk straining your relationship with them. Disagreements over finances can cut through years of love, as evidenced by the fact that money is the top source of stress in many marriages. Additionally, borrowing from a family member can make you lazier with repayments, as you don’t have as much of a legal threat hanging over your head, which can make the situation worse. Even if you keep up with your payments, owing someone money changes the power dynamic in your relationship with them, and can lead to feelings of resentment.

You also have to consider that your family member probably has more limitations on the amount of money they have access to than a financial institution does, and may have their own financial hardships to contend with. They could hit a rough patch and ask you for an early payment to help out, getting upset if you can’t make that happen. The timing of when you ask can also play a factor. You may think that asking to borrow money around the holiday season will catch someone in a more charitable mood, but a lot of people are more fiscally stressed and less able to lend during that time. Even if they can, and even if you can prove your finances are in order, it’s entirely possible that they have a hardline policy against lending money to people they know. A bank can turn down your loan request for a variety of reasons, but rarely are those reasons based on personal philosophy.

Consider the alternatives

If you don’t want to chance jeopardizing your relationships, or if your family can’t give you the kind of loan you need, there are, fortunately, a couple of alternatives. Online personal loans can offer some of the flexibility of borrowing from a family member, with less strenuous application processes, faster funding times and more choices for term length. If you’re trying to borrow money for your small business, many online lenders specialize in funding both new and established businesses and consider loans using alternative criteria, such as Upstart, which takes a borrower’s academic history into account when deciding whether to fund a loan.

If you want a low interest rate and are able to pay off the loan within a shorter time frame, another option is to get a low APR credit card with a long introductory period. You can charge what you need to it, then pay a bit of the balance off every month over the course of the introductory period — which can be up to 21 months, depending on the card — while paying 0% interest. Credit cards often have low minimum payments as well, so if you have a tough month you, don’t have to worry so much about having insufficient funds for a payment. If you choose to get a low APR credit card, just make sure you pay off the interest before the 0% intro APR runs out, or you’ll find yourself stuck paying interest on the balance.

Taking a loan from a family member doesn’t work for everyone, so it’s important to take stock of your needs, estimate what your family can manage and weigh your options. To learn more about how you can benefit your life with loans, follow our personal loans blog, or visit our reviews of the best low APR credit cards to see if that’s the right choice for you.