Borrowing from friends and family
When you borrow from someone you're close to, typically no one signs a contract. You probably won't discuss the repayment terms other than having a vague 'repay me when you're back on your feet' type of agreement, but that doesn't mean this debt has no risks. Here are some you may not have thought of:
Different expectations of repayment
If you don't agree upfront on exactly how and when the money will be repaid, it's easy to feel there's no urgency to repay it. But the person you borrowed from may have a different level of urgency from you about the repayment. Not communicating this from the outset could lead to heated disagreement.
Make sure both of you agree exactly how and when the money will be repaid. And if your friend or family member says, 'Repay me when you have the money', make sure you double-check they really mean that. It might be a long time before you're able to pay them back and you don't want to argue with them about it later.
Changing goal posts
When you sign a contract with a commercial creditor, it's all but set in stone. You know what's going to be expected of you and how you're expected to do it. Unfortunately, when you enter an informal agreement with a friend or family member, things change.
Maybe your friend's wife just became pregnant and he needs you to pay back the money straight away. Or maybe you had a fight with your mum and she wants the money back now. There are plenty of ways to manage when a commercial lender makes an unfair demand, but if you take the same tactic of asserting your rights with a friend or family member, you're likely to strain your relationship with them.
Make sure you agree upfront that this shouldn't happen.
Change in relationship dynamics
When you borrow money from someone you know, they become the creditor and you become the debtor. You owe them - literally. This can change the dynamic of your relationship with them.
Furthermore, while there's a straightforward process commercial lenders must go through to help you if you can't make a repayment on time, friends and family are under no such obligation. Not making a repayment on time may make them resent you and wish they hadn't lent you the money.
Consider carefully how you'll manage a relationship where there's a constant awareness that you're in debt to that person. Many relationships have ended over the issue of money.
It's easy to assume that just because there's no written contract, borrowing money from a friend or family member is safer than borrowing money from a creditor. In actual fact, borrowing money is considered a type of verbal agreement and has the same legal standing as many other types of debts. Your friend or family member can still take you to court to enforce the debt if you don't pay it. Read what to do if you're being sued.