Is borrowing money from kin a good option? INQUIRER.net
May 19, 2009
MANILA, Philippines-- Q:My boyfriend and I are planning to put up a small business—a waffle stand—in a school canteen. We’re a little short of cash, so my best move I think is to borrow money from my father. How can I assure him that I would be able to pay the debt? –Lisa
A: When a financial need arises and one’s assets are not enough to meet that need, a lot of Filipinos consider borrowing from one’s immediate family or from other relatives. After all, when loans are made between relatives, interest may not be charged to help the person in need with his financial burden.
Although this may look good at first glance, getting loans from relatives may not be a good practice. In fact, this may even result to more problems both on the part of the person taking out the loan and the person granting it.
For one, your relationship may be at stake. Because the loan is made with a relative, one may take his time in paying up, especially if times are hard. This may result in resentment on the part of the person granting the loan, and shame on the part of the person borrowing money, thus straining the familial relationship.
What's more, since the loan is between relatives, it may be unthinkable to ask for collateral. “Trust” is enough. But when the borrower can no longer pay the loan, the one who gave money may be put in a difficult situation, especially if he is nearing retirement age.
Borrowing tips
To avoid these problems, why not determine first if you borrow elsewhere: from the bank, a lending cooperative, or from government corporations granting loans, such as the SSS or GSIS? If payment terms seem reasonable, consider this rather than borrowing from relatives.
However, if you are not qualified to get any loan from outside sources, you may borrow from a relative. Make sure, though, to follow these tips to avoid future problems:
• Offer to pay interest at prevailing market rates if possible.
• Put the loan agreement in writing. Agree on the terms, including the payment period. Treat the transaction in a professional manner and your relative will hold you in higher respect.
• Offer collateral. Some jewelry or artwork can be used as guarantee that you will pay off the loan.
• Pay on time. Just like you would pay off a bank loan religiously, try your best to pay off your loan from your relative promptly.
• If you can, pay up even earlier. If business performs well such that you recoup your investment earlier, settle your loan earlier as well.
• If you are hard up, negotiate for better terms. Seek an appointment with your relative, explain to him your predicament, and ask for more liberal terms, such as a longer paying period and lower installment payments. Make sure this new agreement is put in writing. If need be, offer additional collateral.
• Keep your copy of the loan agreement in a safe place. Make sure your family knows where it can be found.
• From time to time, update your relative on how the loan is helping you in your business. Show him your place of business. This will assure him that the loan proceeds are being used responsibly.
And when you have fully paid off the loan, make sure to celebrate. Take out your relative to lunch or dinner to show him how much you appreciate his help during your time of need.
Taking a loan is serious business, whether made with banks, financial institutions, or with relatives. Always do your end of the deal.
