Borrowing money from friends can be tricky, often putting a strain on relationships if not handled with honesty and clear communication. Few things are more uncomfortable than chasing down a friend who hasn’t repaid a loan. However, by following a few simple etiquette rules, you can navigate these situations smoothly and avoid unnecessary drama.
Should You Borrow Money from Friends?
Sometimes borrowing money from friends and family is the best option for your financial situation. You may not have the credit score you need to qualify for a loan. You may have an emergency expense where you need funds quickly. Regardless of your situation, when you borrow money from friends, there are clear do’s and don’ts to maintain your relationship and avoid drama.
Be Transparent
Tell your friend exactly why you need the money and what you intend to use it for. Being vague about why you need the loan may make it hard for your friend to agree to the loan. Try not to make excuses, but instead be honest and upfront. It’s also important to consider the other person’s financial situation before asking to borrow money from them. Don’t put your friend in a tough spot if they can’t afford to lend you money. You also shouldn’t guilt your friend into lending you money. If they say that they can’t give you a loan, don’t pressure them further.
Create a Loan Agreement
Just like with any other loan, borrowing money from friends should come with a loan agreement. This should include how much is being borrowed, when it will be repaid, and if any interest is being charged. There should also be mention of what happens if your friend fails to pay. While a signed agreement may seem unnecessary between friends, it will protect both parties in the long run. If you are borrowing a larger amount of money, you may even want an attorney to draw up this agreement.
Keep Your Promise to Repay
If you are borrowing money from friends, make sure that you are able to repay the loan. It’s important to discuss how they would like to be repaid, for example through Venmo, check, or cash. Then, you’ll have to budget accordingly so you don’t miss any payments. Remember, if you value the relationship with your friend honoring your promise to repay them is paramount.
Consider Tax Implications
If you are borrowing a large sum of money from friends, there may be tax implications to consider. Loans between friends and family can be taxable for both parties. If the value of the loan exceeds $10,000, any interest payments may be considered taxable income. Additionally, if a loan is forgiven, it may be treated as a taxable gift. It’s important to understand the implications of your loan so that there are no surprises for you or your friend.
Have you borrowed money from friends before? What was your experience like? Let us know in the comments.
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