Financial hardships can happen when we least expect them. Aside from personal unfortunate events that can cost money, global crises can hurt one’s wallet too. There’s the COVID-19 pandemic, which still has a major impact on the economy, such as the rising costs of food, housing, and healthcare.

Despite those tough times, not everybody, especially those who only have moderate income, wants to rely on instant money lenders, as they anticipate that they will be burdened with interest. They don’t have savings either.

Instead, they prefer the age-old practice of relying on family and friends for financial aid. Borrowing from loved ones helps buffer the impact of financial shocks, allowing people to navigate a period of uncertainty.

At the same time, despite the benefits, it has its own drawbacks. Before borrowing money from family and friends, especially in times of financial need, you need to compare its pros and cons, especially when compared to instant money lenders in Singapore.

What are the pros of financial safety nets?

Using family and friends as financial safety nets has numerous advantages. 

Trust, understanding, and emotional 

Family and friends are the closest people to you, and they understand your financial situation. It goes without saying that you may trust them more than traditional money lenders. During challenging times, they provide emotional support in addition to financial assistance, making the experience less stressful. 

Flexibility in repayment and no interest

Unlike banks or other money lending institutions that operate to make a profit and therefore charge interest and fees, family and friends are usually motivated by a desire to help you in times of need. That means they can offer flexible repayment options. 

They may also be more lenient with deadlines and can adjust repayment schedules to better align with your income or financial circumstances.

Most family and friends won’t charge you high interest rates or fees when lending money. This can save you a significant amount of money compared to borrowing from commercial lenders, as you won’t be burdened with excessive interest payments.

For example, unlike a traditional lender, your sister would let you won’t attach stringent deadlines or high interest rates if she lent you money for a medical emergency. This should help you have a repayment schedule that won’t hurt your wallet, and get to save the amount of money that would’ve gone to interest.

Confidentiality

When you borrow from traditional money lenders, they check your creditworthiness through documentation and public records. Also, your transactions with money lenders are often documented and potentially disclosed, making your information regarding financial matters less private.

On the other hand, borrowing from family or friends is a more confidential practice, as they see no point in keeping and disclosing information about you.

Lower borrowing costs 

Banks and money lenders have operating expenses, such as staff salaries and overheads, which are often passed on to borrowers in the form of interest rates and fees. When you borrow among your loved ones, these costs are nonexistent, resulting in lower expenses for the borrower.

What are the cons of financial safety nets?

Borrowing money from family and friends seems easy, as you won’t worry the same way as you would with traditional loans, but it comes with its own problems. Many of them aren’t financial. 

Strain on relationships

Money is a touchy subject. If not managed correctly, financial dealings with family and friends can lead to arguments, resentment, or feelings of indebtedness, which can strain your relationship with them. Your personal relationships will be strained and will no longer be the same.

For example, you borrowed a large sum of money from your cousin, and as the return deadline approaches, you’re finding it difficult to make ends meet. This will cause friction and disagreements within the family, disrupting the previously cordial relationship.

Lack of legal protection

Informal financing arrangements between family and friends are frequently not legally binding, which might cause problems if there are conflicts or disagreements. In contrast to formal loans from financial institutions, there may be little or no legal remedy in the event of disagreements about repayment conditions or expectations.

Let’s say you borrowed money from your best friend without a formal agreement. But something happened, and now your friend insists that you owe more than you originally agreed upon. You have no legal option to address this problem because there is no formal contract.

Borrowing from an unfit person

Even if we’re close to our family, we don’t always know what is going on financially in their lives. Are they financially solid, or are they just being kind to us? Borrowing money from family and friends can place a significant burden on the lender, as they want to help the borrower, sometimes to their detriment. 

Let’s say your sister from another country offers you a significant sum for a down payment for your home. However, you found out from another family member that your sister is now going through a rough patch money-wise. It feels bad that she’s going through a tough time after she helped you, but you are unable to repay her at the moment.

Potential for Misunderstandings

Informal financial transactions may lead to misunderstandings about the terms of the loan, interest rates (if any), and repayment schedules. This lack of clarity can cause confusion and lead to disputes or hurt feelings.

Say, your friend lent you money for a car repair, but you had different understandings of when and how you would repay it. This leads to confusion and disagreements about the terms, causing strain on your friendship.

Solutions to borrow money from family and friends

While your friends and family are unlikely to sue you for money, a mistake will make a bad impression on them.

To avoid these, take the initiative to make a loan contract, even if your friends and relatives tell you there’s no need for one. And aside from the lack of legal protection, the majority of the disadvantages mentioned above are the results of misunderstandings due to a lack of documentation, so make sure to include the following: 

1. Names of you and the borrower
2. The loan’s approval date
3. The amount of money loaned
4. The minimum monthly payment is
5. Payment deadline
6. If they charge interest, what is the interest rate?
7. The consequences of a loan default

By making a legally binding contract with family or friends, you are committing to repayment and avoiding the possibility of both sides forgetting anything that has been addressed from the beginning.

Let’s consider our reliable financial safety nets 

Borrowing from family and friends as a financial safety net has its advantages. The emotional support that comes with it, potential cost savings, and repayment flexibility are all compelling reasons to borrow from loved ones. On the other hand, the risk of strained relationships and restricted financial capability that you can cause should not be overlooked.

Individual circumstances, the quality of your connections, and your capacity to maintain open communication and manage expectations when asking for financial aid from individuals close to you will ultimately determine your choice.

Lastly, money lenders can sometimes be a better alternative than borrowing money from both relatives and friends. At the end of the day, a well-informed decision on where to borrow money from ensures both your financial stability and the harmony of your personal relationships.