How to Borrow Money From Family and Friends

1. Consider Your Relationship

Think about the people in your life who might be in a position to provide financial help. It’s probably a good idea to rule out anyone who’s on a fixed income, like a retired parent or grandparent who may have to pull money from a taxable retirement account to provide support. You might also avoid asking friends or family members you’ve borrowed money from in the past, especially if it created an awkward situation.

Accepting a loan from a loved one could be a positive experience for the other person if they have extra cash to spare, especially if they can earn interest on the deal. You’ll have to feel out the relationship to decide if it’s a good idea. If it is, borrowing money from a close friend or family member could help you avoid a financial emergency.

Learn more >> What’s the Best Way to Get Cash Right Away?

2. Create a Loan Agreement

A handshake deal leaves both parties vulnerable to risk. Creating a simple loan agreement is essential, even when the lender is a family member or friend. In fact, it could help the other person feel more comfortable floating you money.

A loan agreement keeps both parties honest and can prevent potential conflicts down the road. It typically includes:

• The amount borrowed: This is the total amount they’ll provide—and what you’ll be expected to pay back.
• Whether the lender is charging interest: Think of interest as a loan fee. If your friend or family member wants to charge interest, the amount should be spelled out in the loan agreement.
• Repayment schedule: When will you begin paying back the loan? And how much will you pay at each milestone? That might be a recurring monthly payment or a lump sum you pay out in the future.
• How the money will be used: Having this in writing can reassure the lender that their money is being put to good use.
• What happens if you stop paying: This protects the lender if you pay late, miss a payment or stop paying all together. They may request that you put up collateral, which is an asset that’s used to secure the loan.

3. Repay the Loan as Promised

With the repayment terms laid out in your loan agreement, it’s up to you to make your payments as promised. Make sure you understand what’s expected of you, then add the new loan payment to your budget. That can help prevent a missed payment and keep your finances in order. Depending on your contract, you might:

• Make automatic monthly transfers from your bank account to your lender
• Manually pay the lender each month with an app like Venmo or PayPal
• Write your friend or family member a check when payment is due
• Make your payments in cash

What to Do if You Can’t Make a Payment

The lender may be someone you know and care about, but your loan should be treated like any other debt. If you’re struggling to keep up, talk to the other person before you fall behind on your payments. They may be willing to accommodate your situation or revise the loan agreement. Your willingness to right the ship can help protect the relationship.

Pros and Cons of Borrowing Money From Friends and Family

Pros

• Low or no interest: Someone you know and trust may be more willing to give you a low interest rate—or not charge interest at all.
• No credit check: It’s unlikely that a friend or family member will run your credit before loaning you money, though they may request to see your FICO Score.
• Quick access to funds: Your loved one might provide immediate financing, depending on their financial situation.

Cons

• Possible strain on the relationship: Owing money to a friend or family member may feel uncomfortable. It could also damage the relationship if you miss payments or default on your loan.
• Payments won’t improve your credit: With a traditional loan, your positive payment history can help you build credit and increase your credit score. However, a friend or family member can’t report your account details to the three main credit bureaus (Experian, TransUnion and Equifax).
• Financing isn’t guaranteed: You may need to borrow more than a friend or family member is able to lend you. As a result, you might have to rely on high-interest credit cards or personal loans to make up the difference.

Do I Have to Pay Taxes on Money Borrowed From a Friend or Family Member?

Personal loans generally don’t count as taxable income, but the person who lends the money may have to pay a gift tax in the following situations:

• They don’t charge interest, or charge a below-market rate: In this case, the IRS might consider the loan a gift or require the lender to pay taxes on imputed interest. If it’s the latter, they could be taxed as if they’d collected a market-appropriate interest rate, even if they didn’t.
• You fail to repay some or all of the loan: The outstanding balance might be considered a gift from the lender. In 2024, donors can give up to $18,000 to any one recipient without paying a gift tax.

Alternatives to Borrowing From Family and Friends

Here’s how to borrow money without involving your personal relationships:

• Consider a personal loan from a traditional lender.
• Look into an intro 0% APR credit card. If you have good credit and can pay back the amount within 12 to 21 months, you could avoid paying interest on a large purchase.
• Explore a home equity loan or line of credit if you have a significant amount of equity in your home.
• Consider a 401(k) loan. Just keep in mind that you’ll lose out on any earnings you could have made if you’d let the money keep working for you in your retirement account.

The best way to avoid asking friends and family for money is to build a strong emergency fund. Having three to six months’ worth of expenses in a liquid savings account can provide peace of mind and help you navigate financial surprises. Even a small cushion of emergency cash can be a game-changer.

Learn more >> Tips to Boost Your Emergency Fund

The Bottom Line

Borrowing money from friends or family may feel awkward, but in some cases, it could be your best option. It can also make financial sense for the lender if they charge interest. And it might make them feel good to know they’re helping someone they care about. Drafting a loan agreement and making your payments as promised can help keep your relationship intact.

If you need additional funding, a strong credit score can help you qualify for the best rates and terms. You can check your free FICO Score and credit report with Experian.