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About this time last year, my boyfriend asked me for $2,500.
It was for a tuition payment, and he said he’d be able to repay me right away. No problem, I thought, ignoring my parents’ age-old advice to never loan money unless I didn’t want it back. This is what you do to support the ones you love. I made the loan. Shortly after, my boyfriend told me he’d transferred the repayment to my bank account.
But a week after that, it still hadn’t showed up. No sign of that $2,500. For days, I tried not to worry about it or question my trust in him. He was a good guy—he wouldn’t steal from me. Right?
Eventually, an envelope from the bank showed up in the mail, and we discovered he’d accidentally requested payment via check instead of wire transfer. I was surprised at how much stress that check lifted from our relationship.
Today, the coronavirus pandemic has left many Americans in a financial bind. Even my mom has asked me if I need to borrow money. I find myself thinking back to last summer, and how fraught that $2,500 loan was. I think about my mom’s offer and wonder: How bad do things need to be for this to be worth it?
When to Borrow Money from Family or Friends
Family and friends have been the biggest source of emergency loans during the pandemic according to a recent study by The Ascent. A whopping 46.6% of those who borrowed money got it from the people closest to them.
There are a lot of benefits to borrowing money from a loved one instead of taking on a personal loan from a financial institution, say financial experts. For one thing, interest rates are super low (or there may be no loan terms at all). And according to The Ascent’s report, popular alternatives, like taking an early withdrawal from a 401K or borrowing against a mortgage, can have serious financial consequences. Taking on a loan to avoid a late payment on something like credit card debt or a student loan (which would then be reported to credit bureaus) can be very appealing.
“The worst thing I’m seeing is…people keep saying COVID will end eventually, and they’re borrowing at high interest rates,” says Megan McCoy, PhD, a professor of practice in personal financial planning at Kansas State University and a board member of the Financial Therapy Association.
As the COVID-19 pandemic stretches on, those quick fixes can put borrowers in serious financial trouble. “It’s so easy to get in a hole because of the power of compounding interest that works against you in these situations,” McCoy says. “Economically, borrowing at a lower interest rate from family or friends is a better decision than a lot of alternatives. But there are always consequences to the relationship when you borrow money.”
How to Borrow Money Without Ruining Your Personal Relationships
Before you ask for money, know the dynamics are going to change.
“Your parents are going to treat you as younger, or infantilize you,” says McCoy. “There’s going to be a tone of condescension that’s natural, but you have to decide if that’s going to be OK and whether you can move past that.” You’ll likely experience some judgment from friends as well, who will now feel involved in your financial situation and the way you spend your money.
“If you guys go out for coffee, and you get a $5 latte, they’re going to think, ‘Oh, you owe me money, but you’re going to spend it on a latte?’” McCoy says.
You can head off some of these complications by following these steps.
1. Assess your situation
Examine your spending over the last few months and figure out where things went wrong. Many financial counselors are also providing pro bono services during the pandemic, McCoy says. If you’re feeling lost, talk to an expert or financial advisor.
2. Be honest with yourself
Did you lose some income but fail to trim your expenses? Did you overspend on takeout and online shopping last month? If it’s a one-time misstep, a loan can act as a bandaid until you can get back on track and repay your lender, says McCoy. If not? You’ll need a more thorough plan for revamping your financial life before you take on a loan.
3. Consider your options
How critical is your income loss? Can you apply for unemployment, pick up a side job, or sell some belongings to cover things until your next paycheck? Asking for a loan should be a last resort, says McCoy.
4. Make your case
Clear, constant communication is the key to family and friend lending. Show your lender your detailed plan for getting your spending back on track. “You can show that person that you really did the numbers and you didn’t come into this asking for money lightly,” McCoy explains. “You’re saying ‘I care about us enough to take this seriously.’”
5. Pick an achievable deadline
Take a hard look at your budget and pick a reasonable deadline for repayment, McCoy recommends. “I’d rather loan someone money and have them say ‘OK it’ll be six months before I can pay you back but you’ll definitely have it in six months,’ than have them say ‘I’ll get it to you next paycheck,’ and then spend month after month waiting,” she says. This should be a reasonable deadline for yourself and for the family member lending money. An emergency loan should be a short-term commitment for you both.
6. Put the repayment terms in writing
Treat this like a business transaction and make a loan agreement with your lender. Write down when you’ll repay the loan, how you’ll repay it, if you will pay interest, whether there will be any collateral involved, and what you’ll do if another emergency affects your ability to make loan payments (including late fees). A written plan or promissory note is more useful for holding yourself accountable than anything else, McCoy says, though written documentation can also be handy in case of legal disputes. If you plan to borrow more than $15,000, the lender may need written documentation or have to charge interest to avoid paying gift taxes to the IRS, she adds. (Unsure? Consult a professional about any tax implications.)
7. Stick to the plan
If someone is loaning money to you, pay them back in full and on time. Taking advantage of your close relationship with your lender for a below-market-rate loan and then slacking off on repayment will just further undermine their trust and respect, McCoy says.
Coronavirus Makes Family Loans More Complicated
In “normal” emergency situations (i.e. not a global pandemic), borrowing from family or friends is often a good option vs a traditional lender, says McCoy. But family loans work best when there’s a clear timeline of financial recovery and therefore repayment. With the coronavirus, that timeline can be hazy.
“The thing is that no one knows when [the pandemic] is going to end,” says McCoy. And waiting indefinitely for a friend or family member to pay you back—as I learned when I loaned my boyfriend that $2,500—can strain the relationship.
Instead of asking for a lump sum to patch up income loss during the pandemic, McCoy recommends brainstorming other, more sustainable forms of help.
Consider moving in with your parents or a sibling, or selling your car and asking a friend or family member to carpool or drive you to work for a while. Those solutions could have bigger, longer-lasting impacts than a one-time check, McCoy explains. Plus, they help you avoid getting into debt you might not be able to pay off.
Disclaimer: The opinions expressed by the interview subjects are not necessarily those of Earnest.