Of all the ways to borrow money, whether it’s a personal loan to cover a short fall, because of hard financial times, few ways are more painful than borrowing money from friends or family. In fact, most people would rather borrow money from a loan shark than a family member or friend.
While borrowing money from family or friends is better than these high interest alternatives, this type of very personal loan is fraught with what financial advisors call “relationship risk.” Even before any money changes hands, it’s awkward and uncomfortable for everyone.
Of course, the first thing that must happen is that your family member or friend must have the funds available for a loan. If they do, then one of the best ways to make the process more comfortable for everyone is to treat the loan like a formal business transaction by drawing up a promissory note with an agreed upon interest rate, repayment amount, and a schedule of repayments. (You can download a promissory note from Legalzoom.com)
Additionally, the family member or friend must charge you interest or the IRS could see the loan not as a loan but as a gift. This means the family member or friend could incur a gift tax.
So, in the end, putting aside for the moment the personal awkwardness of even asking for this type of personal loan, it’s a pain to set things up so that it looks like a real business transaction rather than a hand out, and then if you’re late or if you miss a payment or – worse – default on the loan, not only could you incur further financial and legal troubles, you could damage an important personal relationship.
A Peer to Peer lending Loan is a Better Way to Borrow Money
Compared to siblings or friends, there is a far better way to borrow money, and that’s a peer to peer personal loan. A peer to peer personal loan is a formal, legal business transaction and, depending on the size of the loan you need, you’re likely to get the loan funded more readily and easily from a peer-lending group than a family member or friend. This is because peer-to-peer lending sites work by aggregating small sums lent by many individual lenders. For example, instead of borrowing $5,000 from a single source, you can borrow $50 from 100 different sources or individuals. Since each individual lender is risking only a small portion of the total loan, the lending source is more willing to take the risk than if they were lending the entire amount.
Assuming you have good credit, a peer to peer personal loan can work for you — without all the added relationship risk.