Jerry Brown is a freelance personal finance writer and Certified Financial Education Instructor℠ (CFEI®) who lives in New Orleans. He covers a range of personal finance topics, including credit, personal loans, and student loans.
Expertise: Comprehensive financial planning, tax planning, investment planning, retirement planning, estate planning
Michael Menninger, CFP®, and the founder and president of Menninger & Associates Financial Planning. He provides his clients with financial products and services, always with his client's individual needs foremost in his mind.
A personal loan is a lump-sum financing tool with set monthly payments. You can get one from a bank, credit union, or online lender.
However, you might consider borrowing from a friend or family member because they offer a much lower rate than a traditional loan or more flexible repayment terms.
Borrowing money from a family member is often tricky. If you default, it can cause a rift in your relationship. As a result, it’s crucial to have a personal loan agreement with the family member that outlines the loan terms, including the interest rate and repayment schedule.
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Borrowed money from a family member can help you avoid a payday loan or another high-interest option. It can be issued just like a traditional personal loan in a lump sum. Once you receive the funds, you can repay what’s owed according to an agreed-upon schedule.
When creating a personal loan agreement, you should discuss these components:
Whether you’re charged interest on the loan is up to the family member. They could decide to charge no interest on the loan. However, if they loan you over $10,000, they must set a minimum rate based on the IRS’ applicable federal rates guidelines.
You could use a personal loan calculator to create a repayment schedule. For example, say the family member agrees to loan you $2,000 at 5% interest over four years, here’s what the repayment schedule could look like:
| Monthly payment | Total interest | Total cost |
| $46 | $211 | $2,211 |
Once you decide on the loan terms, you should write the personal loan agreement and have both parties sign their names. Doing so makes the document legally binding. Although this document doesn’t have to be notarized or signed by a witness, it could help add credibility.
If you have trouble repaying the loan, communicate with the family member. They may be willing to modify the loan agreement or temporarily pause payments. But remember, if you default on the loan, they could also take you to court.
The agreement should include these elements:
If you have any questions about the agreement, discuss them with your family before signing. The document should be crystal clear to both parties to minimize future misunderstandings.
What happens in the event of death? Consider naming the lender a beneficiary to the policy.
A personal loan agreement contains the same elements, whether between friends or family members. However, when a family member is lending you money, they may be more willing to forgive late payments.
Family members might also be more willing to lend to you without a formal contract. But even if they’re willing to do that, we recommend having a personal loan agreement in writing.
Before borrowing money from a family member or friend, consider the advantages and disadvantages.
If you are a family member being approached for a loan, only you can decide whether it’s a wise move. That said, the following table includes some scenarios where it might—or might not—be an excellent decision.
| Consider loaning money to a family member or friend if … | Reconsider loaning money to a family member or friend if … |
| ✅ You can afford to loan money | ❌ Lending them money would jeopardize your financial stability |
| ✅ You have a trustworthy relationship with the borrower | ❌ They have a history of not repaying past family or friend loans |
| ✅ They’re willing to sign a written agreement | ❌ They refuse to sign a written personal loan agreement |
If your loaning money to the family member wouldn’t put your finances at risk, giving them a loan could make sense.
If you’ve lent money to a family member in the past without any hiccups, they’re probably more likely to repay you as promised.
We recommend not lending money to anyone unwilling to sign an agreement outlining the terms and conditions of the loan.
Loaning money to a family member isn’t wise if it stops you from achieving your financial goals, like saving for a home or paying down debt.
Think twice before lending money to someone with a history of defaulting on loans.
We recommend not lending money to anyone unwilling to sign an agreement outlining the terms and conditions of the loan.
Before you lend money to a family member, consider your overall financial situation and theirs. Review your finances to ensure you can afford to lend out money. Ask them to share details of their financial situation, like income, so you can assess their ability to repay the loan.
One of the most common mistakes people make when loaning money to family or friends is not having an agreement in place that defines the terms of the loan.
Weighing the pros and cons of various financial resources is key to making informed decisions.
Personal loans between family or friends may be appealing due to their flexibility and potential for lower interest rates. Still, one of these alternatives might fit your needs better and lessen potential relational strain.
Unlike personal loans between loved ones, traditional personal loans are a formal financial contract with an established lender. For those concerned about their credit score, credit unions or online lenders targeting bad-credit borrowers can provide useful alternatives.
These can feature competitive loan terms and fixed repayment schedules. Of course, your creditworthiness often determines the interest rates, which can be higher than what you’d get from a family member or friend.
Secured personal loans offer a solid alternative for those with assets to pledge as collateral. These can be less risky for lenders, often resulting in more favorable interest rates. However, failure to repay may result in the loss of the asset pledged as collateral.
Instead of borrowing, consider using your savings. This approach has the advantage of no repayment terms or interest rates. But it could also deplete your emergency fund or savings for other future needs.
Peer-to-peer lending involves borrowing from an individual or group instead of a financial institution. It’s somewhat similar to borrowing from family or friends, but it’s a more formal setup with strict repayment terms and has the added anonymity benefit.
For those with good credit, 0% or low-interest credit cards can be cheaper than borrowing from family or friends. However, be cautious of potentially high interest rates once the promotional period expires.
Payment plans or financing, particularly for big-ticket items, can sometimes be negotiated with the vendor. These arrangements often come with no interest or low rates for a specific period, making it a potentially inexpensive way to finance a purchase without involving family or friends.
Crowdfunding platforms offer nontraditional financing methods for individuals, particularly those with creative projects or facing hardships. But you often need a compelling reason for strangers to contribute to your cause.
Depending on what the money is for, grants or assistance programs available from government agencies or nonprofit organizations could help meet your financial needs, making this a no-obligation alternative.
For financial challenges, professional guidance from a credit counselor might be helpful. They could help in budgeting, financial planning, and sometimes negotiating with creditors for more manageable repayment terms.
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