Borrowing money from a friend? Here's why you should be cautious of it

In recent years, the trend of borrowing from friends and family has decreased significantly, thanks to the ease of accessing institutional loans with flexible repayment options. However, turning to loved ones remains a common choice if we face difficulties securing a loan due to a poor credit score, outstanding debts, or other reasons.
While friends and family may be willing to assist during financial hardships, weighing potential repercussions before seeking their help is crucial. Here are some considerations to keep in mind:

1. Low or no interest component
When you take out a loan, you usually consider the interest rate when choosing a lender. However, you often don’t discuss interest rates when you borrow from friends or family. Instead, you generally agree that no formal interest will be charged or that a minimal, informal amount will apply. Consequently, the lender in these personal arrangements may miss out on potential interest income.

2. Vague repayment terms 
The lack of formal documentation is a significant feature of borrowing from friends and relatives. These loans are often agreed upon quickly, sometimes over a casual conversation or handshake. This informality can lead to disputes and arguments later on, as there is no concrete agreement to refer back to, resulting in potential ‘he said / she said’ conflicts.

3. Sheer awkwardness
When you borrow from a bank, it is common to visit them again shortly after without much concern. However, you often feel a subconscious sense of obligation when borrowing from friends or relatives. You might frequently mention that repaying the loan is a priority, making the lender uncomfortable and potentially strain the friendship.

4. Inability to pay during their time of crises
If the friend or relative who lent you money faces a financial crisis of their own, you might struggle to help them in return. If you’re already financially strained by the time they ask for repayment, you may feel guilty for not being able to support them, adding to the emotional burden of the loan.

5. Risking the relationship
When we borrow money from friends or relatives or even just ask about borrowing, we risk creating distance in our relationships. Financial obligations can impact even the closest friendships, introducing a range of emotions and considerations into the interaction. Both parties may become more cautious and guarded, which can complicate the relationship, sometimes irreparably. Mentioning a past loan from a cousin in a casual conversation years later might strain the relationship if not handled carefully.

6. Available security when you fail to pay loan repayments
When borrowing from a family member, consider this key aspect: unlike banks, which require secured compensation for loans—such as assets or high interest rates in the case of unsecured loans—a friend or relative lacks such formal security measures. Banks will seize an asset or impose penalties if you default on your loan. However, a friend is unlikely to take similar actions, which can leave them at a financial loss. If you later cannot repay, the situation can become very complicated, potentially straining or jeopardising your relationship.

Any of these scenarios might lead you to question whether seeking financial help from a friend was the right choice. You might worry about them developing a superiority complex or that it could become known within your circle that you’re struggling financially. Due to your financial situation, there’s also the risk that friends might exclude you from social activities, like dining out. In such cases, you may find that a discreet EMI arrangement with a bank could have provided you with greater peace of mind.

A loan from a friend or family member might be handy and beneficial, but it comes with certain risks. Exploring all possible loan options before turning to loved ones for financial support is best.

One such option could be applying for HDFC Bank Personal Loan.

Its features include, among many others, checking your loan eligibility online in one minute and loan disbursal in one working day after you submit your documents. Selected pre-approved customers can disburse their loans in their accounts within 10 seconds, and non-HDFC Bank customers can disburse their loans within 4 hours. You can also take advantage of the flexible repayments of ₹2,149 per lakh.
Read more about why you shouldn’t borrow money from friends and family.

Click here to apply for a Personal Loan from HDFC Bank now!

* Terms & conditions apply. Personal Loan disbursal at the sole discretion of HDFC Bank Ltd.