The Pros And Cons of Borrowing Money From Parents

From time to time a child might well need some financial assistance from one of their parents. This doesn’t necessarily mean that the individual cannot obtain funds elsewhere. But, often by utilising an existing relationship, they can get their hands on the money faster. This informal arrangement has become more popular in recent times.

However, like most other financial agreements it is not without its pitfalls. This blog post will aim to take a closer look at some of the pros and cons of borrowing from a parent or close family member.

Embarrassment Factor

One of the major downsides to this type of borrowing is that they will need to divulge to their parents exactly the reason for needing the money. Of course most people will have no issue at all in doing this; however, there will be some that just won’t want to share this information. This will largely depend on the type of relationship that they already have with their parents.

If the reason for needing the money is private and personal, this can represent a huge stumbling block. In this situation there is no doubt that an element of children will “bend the truth”, perhaps to save them from embarrassment.

Another negative to this type of financial arrangement is that the parents will also possibly want to know why the individual is not going to a bank or other institution. Again embarrassment can set in, especially if the son or daughter doesn’t have a very good credit rating; hence preventing them obtaining funding in this way.

Quick and Easy

Asking parents to help out financially tends to be much quicker and easier than going to a bank. There are no long forms to fill in, not too many questions are asked. Instead of waiting for approval to be granted, normally the money will be made available immediately.

This type of loan will not use any credit reference agencies. Which, when a person has bad credit can be a good thing. However, it can also actually be a negative thing. This is because; when a bank loan is concluded satisfactorily it can serve to enhance an individual’s credit rating.

Potential to Fall Out

A major issue that should never be underestimated is the impact of slow or even non-payment. When borrowing from a parent this very often leads to a serious falling out. Of course, when borrowing from a financial institution there are likely to be serious repercussions for missing payment. However, the damage that can be caused in a family environment can be very hard to repair.

Very often the borrower will not feel that it carries the same weight as a when borrowing money from a recognized financial institution. This can quickly lead to resentment and rowing between family members.

Little or No Interest

Another excellent reason for using parents to borrow money is that in the vast majority of cases the loan will be free of interest. This makes it a lot cheaper than other borrowing methods. Of course, a thought should go to the parents here. After all they will be losing earnings on the money that they have loaned.

Even when the parent just keeps the money in a regular savings account, they will still lose an element of interest. With this in mind, many children feel it is better to cover these costs for their parents. So for example, on a £1,000 loan they might well return them £1,050 at the end of the year.

When the Money is Gone

A consideration that parents need to make surrounds whether or not they can afford to lend to their son or daughter. Often they might need the money themselves for some other project. Once the money is lent out, it won’t be there again. So when the parents need to raise some money they will be faced with borrowing from their bank or other financial institution. Nearly always this will cost them more in interest than they would have lost by using their own money.

The Wrap up

Borrowing from parents can work out really well for both parties. Often the parents will take a real sense of satisfaction in knowing that they have helped out there offspring. However before taking the step to lend money in this way it sensible for everyone to sit down and discuss things. By doing so it will help to avoid potential issues further along the line.

William Bancs is a blogger who writes often about financial matters. For advice on getting a loan, be sure to follow him on Google Plus.