Close friends and family members are always willing to help us get out of a bad financial situation. It has been a common practice for decades. On the other hand, borrowing money from friends and family, can be difficult due to potential misunderstandings that can harm relationships.
Due to the easy availability of institutional loans with convenient repayment terms, however, the tendency to borrow money from friends and family has decreased significantly in recent years. Nonetheless, it remains a popular option when we are unable to obtain a loan due to a poor credit score, previous unpaid loans, or other factors.
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There may be friends and family members who are willing to assist us in our time of need. However, before you plan to take a loan from your friend, you should consider some possible outcomes.
5 Reasons Why Borrowing Money from Friends is Not a Good Idea
Terms of repayment are vague
This is a major feature of loans obtained from friends and family. When you borrow money from them, it is frequently impossible to put the terms on paper. Such loans are frequently finalised over a cup of tea and a handshake. Sometimes disputes and arguments occur because there is no concrete agreement in the first place, and the parties may resort to ‘he said/she said’ accusations.
There is no or little interest component
The interest rate is an important consideration when choosing a lender when taking out a loan. However, interest is not usually discussed when borrowing from a friend or family member. Both parties appear to have agreed that interest is either not charged or is charged in an informal amount. As a result, the lender is likely to lose some interest income in this type of loan.
Inability to pay during a crisis
If the friend you borrowed from ever needs money, you may find yourself unable to help them in return. It’s entirely possible that your friend or relative will experience an unexpected financial crisis soon after lending you money. You may be broke by the time your friend approaches you to ask if you can repay the loan earlier than agreed. You may experience feelings of guilt if you feel responsible for your friend’s financial difficulties.
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It is common to obtain a loan from a bank and then return a few days later. When we meet a friend or relative from whom we have borrowed money, there is a subconscious feeling of indebtedness, and you are very likely to mention at least once that you are working on repaying the loan and that it is on your priority list. You may embarrass your money-lending friend by mentioning the same thing every time you meet, and this awkwardness may affect your friendship.
Putting the relationship at risk
When we borrow money- or even inquire about borrowing – from friends or relatives, we risk alienating them. Money can have an impact on even the most sincere friendships. When we interact with someone to whom we owe money, we experience a range of emotions. We will consider a number of additional factors before speaking with them, and vice versa. In other words, introducing a financial element into a relationship can significantly complicate it, sometimes irreversibly. If you casually mention it in a random conversation years later, the fact that you took a loan from a cousin may be enough to strain the relationship.
Available security when you fail to pay loan repayments
This is something to think about when borrowing money from a friend or family member. Banks always request a secured compensation if you fail to repay the borrowed funds. It can be in the form of a secured asset, such as a car or property, or in the case of unsecured loans, high interest rates. If you fail to repay the borrowed funds, the bank will either seize the asset or charge a late penalty on your next EMI.
A friend is unlikely to do something like that, leaving them in debt. As a result, if you later discover you are unable to repay a loan taken from a friend or family member, the entire discussion becomes extremely complicated, potentially jeopardising your friendship.
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Is There A Better Option?
Any of these scenarios may make you question whether borrowing money from friends was the right decision. What if they suddenly develop a superiority complex over you? What if it becomes known that you are the family’s financial black sheep? What if your friends go out to dinner in a nice restaurant but leave you out because they know you’re in a financial crisis? Situations like these may lead you to rethink about your decision of borrowing money from your friends.
A loan from a friend or relative, as convenient as it is, comes with its own set of risks. As a result, it is prudent to investigate all possibilities before turning to our near and dear to borrow money.
Pratik is a salaried person earning 50,000 per month. He wanted to buy a scooter from a long time but could not save a lumpsum amount. One of his friends told him about the Money Club. He opted for a chit scheme of Rs 60000 for which he had to pool in 3000 per month for 20 months which was comparatively easy for Partik. After 2 months, that is by just paying Rs 6000 he was eligible to get a lumpsum amount of close to 60,000. Pratik bid for the lumpsum amount and won Rs 55,000 and bought a scooter for himself. This was however not possible earlier. Pratik continued to pay the installments till the end of the chit scheme. If Pratik had opted for a loan from bank he would have pay at least 12% rate of interest but in this case the interest rate was barely 5%.
Invest In Chit Fund And Start Your Savings Journey
- Instant and Quick Disbursal of Money: When you borrow money from chit fund you get the money within 6-8 hours in your account. When you need money you can participate in the bid and get the money instantly.
- No Documentation Required: There is no documentation required at the time of participating in the bid. This is because your documents are verified at the time of joining the chit scheme. Only verified members are allowed to participate in the chit scheme. Hence, there is no chance of fraud.
- Online Application: The whole process is online. The main point is that unlike traditional chit funds the money is not with the intermediary. When the auction takes place each member transfers the amount directly to the winner’s bank account. So, there is no chance that the intermediary will run away with the cash. Hence, Money Club chit fund is absolutely a safe platform and your money is also safe.
- Clarity in transaction: A loan from family or friends would be a verbal arrangement. Even if both parties have the best intentions, it is quite possible that with time, one or both of them would forget the details of the agreement leading to confusion and stress. On the other hand, a chit fund is a financial transaction between the borrower and other verified members. There is no confusion about its terms, tenure and interest rate.
- Repayment through easy EMIs: If Pratik borrowed from his friends, he would be expected to repay the amount as a lump sum. This could prove problematic in case he doesn’t have the funds then. With a chit fund scheme, however, the repayment will happen through monthly installments an amount he could afford to pay.
Different Ways to Borrow Money In India
- No risk of damaging relationships: Pratik believes that the most important advantage of investing in chit fund rather than borrowing money from friends and family is that he will not risk damaging his relationships. If he is unable to repay his friends on time for whatever reason, it will become a source of conflict in the relationship and lower his self-esteem.
Why risk all that when you have Money Club? Money Club gives you a chance to save money as well as borrow money when you need it urgently.
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