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Advantages & disadvantages of borrowing money from family

Whether you need money for a business or personal needs, you may find yourself in a position where the most viable option you have is to borrow from a family member. While this method of getting funding seems like a reasonable solution, it comes with both advantages and disadvantages that you should consider before approaching a relative.

No- or Low-Interest Rate --- Advantage

One of the most important advantages of borrowing money from family is the fact that you don't usually have to pay high-interest expenses on the loan. In some cases your family member may offer you the money at a very low- or no-interest rate at all. Also, instead of charging compounded interest (interest charged on both principal and interest), many personal loans from family members are based on a simple interest calculation (based on principal only).

Simpler Transaction --- Advantage

Another advantage of getting a loan from a family member is that you don't have to worry about a long and complicated loan application and approval process. In order to apply for a loan from a bank you must fill out a long form detailing all of your finances and wait days or even weeks for an approval. When you apply for a loan from someone you know, the process is as simple as asking, waiting for a yes, and signing a promissory agreement to make things official.

No Credit Reporting --- Disadvantage

When you get a loan from a bank, the lender can report your payment history to a credit bureau. If you make timely payments and pay off the loan as agreed, that can boost your credit score. Also, a mix of different types of credit accounts, including loan accounts, can positively affect your credit score. But if you get a loan from a family member instead of a bank, that information is not reported to credit bureaus.

Reputation --- Disadvantage

One of the downsides of borrowing from a family member is that if you default on the loan, your financial reputation is not the only issue at stake. If you cannot repay the loan as promised your family reputation is at risk as well. Borrowing from a family member can lead to mistrust and conflict issues between family members if the obligation isn't repaid.