Personal Finance Advice

When you need a loan -whether it’s for a major purchase or because you have fallen behind financially and need to catch up - you might find yourself in the position of weighing the options between getting a loan through a financial institution or instead taking a friend or family member up on an offer for a loan.  Both options have pros and cons, and it’s important to examine the situation carefully before making a decision.

Pros and cons of obtaining a loan through a financial institution:

Pro:  By making timely payments you will build up your credit score.

Con:  Financial institutions aren’t incredibly lenient when it comes to late payments.

Pro:  The recordkeeping of your account information is usually meticulous.

Con:  You will wind up paying interest charges in addition to any other fees imposed by the lender.

Pros and cons of obtaining a loan through a friend or family member:

Pro:  Your friend or family member may not charge you any interest.

Con:  Owing someone money can really change the dynamics of the relationship.

Pro:  The payment schedule may not be as rigid as with a financial institution.

Con:  If you fall behind in payments, you might wind up jeopardizing the person’s financial standing.

Which scenario is better? A lot depends on your particular situation.  If you have a low credit score then a loan from an individual might be your only chance for getting your hands on some money without paying a really high interest rate.  On the other hand, if you have hopes of someday raising your credit score then you’ll have to eventually join the ranks of people who borrow money from financial institutions in one form or another so you can demonstrate your ability to repay a debt.

Keep in mind the psychological ramifications of borrowing money from a friend or family member.  How would your relationship with your uncle or best friend change if you were suddenly unable to pay back money lent to you? It’s one thing to miss a loan payment due to unforeseen circumstances to a faceless lending institution, but it’s another thing entirely to miss a payment to someone you have a personal relationship with.

The bottom line is this: If you can get a decent interest rate through a financial institution, then use this method when you need a loan.  Borrowing from a friend or family member should be something you do if you have no other choice, or if you can be entirely certain that it won’t potentially result in problems.

After all, it’s amazing what even the smallest loan can do to change the tempo of a relationship.