Financial Thoughts

Loans – Consumer and Family

Family and money

By applying for and receiving a consumer loan, you then have the flexibility and the opportunity to use that money as you see fit. You are usually able to get these loans with a better or at least lower interest rate than you would be paying if you used your credit card.

An Unsecured Personal Loan?

What is the best thing about unsecured loans?
If you get an unsecured loan, it means you do not have to put up any collateral when you apply. The lender will have other ways of making sure they get the money back, so don’t misinterpret the lack of collateral as being a soft ‘out’. If you have stable finances, then this type of loan is a better fit for an individual. Stable finances mean a person with a steady income and low to moderate household debt.

Good Credit Means Lower Interest

The advantages of having a reasonable credit score will be rewarded with a lower interest rate. Interest and risk go together, so the risk of default by a proven borrower is a safe bet from the lender’s perspective.

An unsecured loan might be the only choice as well when an individual has no realistic collateral to offer. It’s not a way that you would use to finance your home purchase, as that’s what mortgages are for, but it’s an okay way to purchase any other emergency things that may not be able to be secured.

Strategic Use of a Loan! Use your Responsibly and Wisely!

Don't use loans
It’s not a bad strategy to use unsecured loans to buy goods with long-lasting value. For example, borrow to build a shed in which you can work on hobbies, for either pleasure or extra income. Or use the money to buy a lawnmower which would normally last a few years. For what reasons should an unsecured loan NOT be used?

Fixed monthly costs: Unless it’s a one-off exception, (washing machine broke down), a loan should never be used to cover any of your fixed monthly costs. If you can’t afford these monthly utilities and other expenses, then it means you have some serious problems with your household budget. Borrowing money to pay the bills will only add to the financial strain of your household.

Deposit for Home Purchase: You should not be using anything but your savings to put down a deposit on a home purchase. There are several reasons for this, but the most important one has to do with the financial risks you’re taking. Any rises in the interest rate, or if you lose your job, and you will find it extremely difficult in making your mortgage repayments. Add an unsecured loan to that, and you are adding stress to an already anxious situation. It’s so that you’d take less of a financial chance when you sign for the mortgage.

Interest on other loans: As obvious as it may seem, it’s worth mentioning, and should not be ignored. A simple financial rule, and a common sense one – never use a consumer loan to pay interest on other loans. That’s simply exacerbating an existing problem and certainly adds fuel to the fire.

The Friends and Relatives Loan

Loans from friends or family
Most of us would remember as teenagers when we asked our parents if we could ‘borrow’ money to go to the mall, the movies, or to buy something you have had your eye on for quite some time and the desire to have it is all-consuming. Mum or dad would reply with: “I’ll give you some of the money. You will have to earn the rest.” Or, “How do you think you will pay me back?”. It’s not even certain we would have used the word ‘borrow’. Then again, get real, how often did we ever pay the money back? 😊

Borrowing means…

Borrow is a rather interesting word. According to the dictionary, the word means taking and using something that belongs to another, with the full intention of returning it. When we borrow money from our parents, there is more than likely little or no intention of ever repaying it. Lets’ face it, if you didn’t have a part-time job or were not being paid weekly pocket money, what chance was there of ever making repayment anyway? Our use of the word ‘borrow’ was to hopefully wing the deal our way, so we could do whatever it was that we had planned.

The Adolescent Change to Money

Borrowing money as a kid and teenager is a whole lot different to borrowing money as an adult, to either invest, spend, or for a business venture. If you never repaid the money to your folks did they stop talking to you? They might have been a bit annoyed after not seeing a repayment coming their way after a few weeks, but they treated you no differently. Would a friend or cousin ‘unfriend’ you on social media if you never repaid the money you might have borrowed to buy a pizza?

Friendly Fire

These examples are trivial and perhaps petty, albeit real, but the resultant reaction would be very different if these same people were investing in your business or were lending you a substantial amount to get you out of trouble. Your family and friends would love to see you succeed. They will cheer and motivate you along the way. They would do anything to ensure success. Physical help, advice, and interest in your life, are some other areas of assistance. But, believe it, things can turn ugly when something goes wrong. Your business fails or hits a development bump, and there is no hope of you repaying money your family or friends may have lent you.

Friendly Loans are the Best Loans

There are certainly some perks to borrowing from friends and family. The process is a lot easier (maybe?) than being put through hoops by a bank or another type of lender. Think about it. You borrow on your own terms, almost. You would get the money a lot faster than from a bank. And, a real bonus is if needed, the ability to adjust the repayment deadlines may be a little bit more flexible with much less harsh repercussions.

The Hidden Cost of Family Lending

Loans warning!
It all sounds ideal borrowing from family and friends, but… it’s not! There are almost two cons for each pro just mentioned. Avoiding dealing with banks sounds great, but when things go pear-shaped either personally or in your business, get ready for a nightmare.

People with whom you have had a lifelong relationship can abruptly stop speaking to you. In fact, you go out of your way to avoid them. You can be left off the wedding list of your best friend, even if you were the Best Man or the Maid of Honor. What about festivals such as Christmas, Thanksgiving or a Birthday and celebrating without those people who have been a part of your life since forever? Not to mention unpleasant texts and voicemails from these same people.

Become a Hermit!

Not repaying a bank loan is not such a problem. Bumping into the bank manager or the loans officer in the supermarket would not even worry you. But it would be somewhat different in the same scenario and bumping into a friend or relative to whom you owe money. You might as well become a hermit!

Keep your Finances Private

In the end, it’s best to keep your finances on a formal footing and using the services that are available to you on an impersonal and business level. If relationships mean a lot to you, then don’t jeopardize them by borrowing from friends and family. A passion for business is great. But business is business. Friends are friends. Family is family. Try not to mix them at the risk of losing any.

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