If you are experiencing financial distress, you may think about turning to relatives for help. Borrowing money from a family member to pay off a creditor can seem like a practical solution.
However, it does have its share of downsides worth considering before you take this route.
One of the most significant downsides is the potential strain it can place on your relationship. Money matters often create tension and conflicts among family members.
About 59% of U.S. adults who loaned a friend or relative money had something bad happen, such as a lack of repayment and/or a damaged relationship with the borrower. If you fail to repay the funds promptly or encounter financial difficulties that prevent repayment, it can lead to resentment, arguments and even permanent damage to the relationship.
Lack of legal protections
Unlike formal lending institutions, borrowing from a relative does not come with legal protections and regulations. This lack of legal structure can leave both the borrower and the lender vulnerable.
Without a clear agreement, there may be no recourse if disputes arise over repayment terms or the amount borrowed. Clarity and transparency are often lacking in informal family lending arrangements, which can lead to misunderstandings and complications. Also, payments to family on money borrowed can create preferential payments that are problematic and recoverable by a trustee if you ultimately need to file for bankruptcy.
When you rely on family members to pay off a creditor, you risk becoming financially dependent on them. This dependency can limit your financial independence and make you uncomfortable asking for help in the future. It can also hinder your ability to develop healthy financial habits and learn to manage your finances responsibly.
Borrowing from a relative can lead to unequal treatment within the family. Other family members may perceive you as receiving preferential treatment or causing financial disparities within the family. This can create resentment and jealousy among family members, further straining relationships.
When borrowing from a relative, the accountability for financial decisions can diminish. Instead of facing the consequences of your actions, you may become less motivated to budget, save and make responsible financial choices. This can lead to a cycle of borrowing from family members to cover financial gaps, perpetuating financial instability.
While borrowing money from a relative to pay off a creditor may seem like a quick fix for a financial problem, it comes with several significant downsides. Before proceeding with this step, carefully consider alternative options, such as negotiating with creditors, seeking financial counseling or exploring more formal borrowing arrangements. Weighing the pros and cons will help you make a well-informed decision about your financial future while preserving your family relationships.