Are Personal Loans Between Friends a Bad Idea? |

Personal loans are getting harder and harder to obtain. Even if a borrower wants to try for a secured personal loan, using their home as collateral, they often find they have negative equity, making it impossible to obtain a personal line of credit. In desperation, many borrowers are turning to friends and relatives to obtain personal loans, despite the warnings of many financial advisors. Critics of this method warn that it will strain relationships and ruin friendships, but for many borrowers, it remains the only option they have. If you do choose to go this route, there are some steps you can take to make the process as pain-free as possible.

Step One: Craft a Realistic Plan Before you approach anyone with a personal loan request, it’s wise to sit down and assess your situation realistically. Begin by assessing how much you need to borrow to get by, and try to make that amount as small as possible. Figure in any overtime you can work, items you can sell, and other acts you can commit that will reduce the amount of your principal balance. Then realistically figure out how much you can afford to pay back each month, including interest. Make sure this is an amount you can pay back even if you don’t work overtime–in other words, err on the side of caution.

Step Two: Approach Your Lender Professionally This is a business transaction, so you need to approach your potential lender in a professional manner. Find a good time to speak in person, and bring along your debt reduction plan and repayment schedule. Explain why you need personal loans, the steps you are actively taking to reduce your debt amount, and how much you need to borrow. Show the lender your repayment schedule and explain why this schedule is both realistic and conservative. Offer to put everything in writing, and even opt for a peer-to-peer lending website, which allows both parties to enter the loan terms in a neutral form.

Step Three: Pay Personal Loans Back Finally, you will need to work diligently to pay the loan back in a quick manner. You will need to refrain from spending money frivolously while you owe a friend or family member money, so delay any vacations or splashy purchases until well after the debt has been repaid. Some friends or family members may decide (independently, of course) to forgive your personal line of credit. If they choose to do so then make sure you get this in writing, too.