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The main advantage of receiving a loan from a friend or family member is that your “lender” is more likely to be flexible about payment arrangements. Also, when you borrow from a loved one, you often can borrow 100% of the required amount and enjoy lower interest rates (or no interest at all). The most unfortunate part of borrowing from someone you know is that your personal relationship could be damaged permanently if the situation goes south.
Treat a personal loan issued by a loved one with the same respect and professionalism as you would a loan from a bank. If you plan to borrow money from a bank, credit union or other lending institution, you already know you must be prepared to sign a legal contract outlining your obligations to the lender: On time payments until the loan is paid in full. This contract is called a promissory note.
Should it be any different if you borrow money from friends or family? Not really. Even though they may have known you for years or even a lifetime, they still need assurance that you’ll pay them back as promised. The fact you know them really well doesn’t remove any of the obligations and responsibilities associated with taking on a loan.
It is a wise move to draw up and sign a loan contract regardless of your relationship with the lender. This protects both parties in case of a disagreement. A loan agreement between two individuals is more simplistic but very similar to a standard bank promissory note.
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