Taking a loan from friends and relatives is the easiest and convenient option to avail funds for emergency financial needs. With a flexible repayment method, is it the most popular source of funds? Here are some pros and cons of taking a loan from your closed ones that you must consider if you are thinking about making one. Let us also see how credit score plays an invariable role in the same. A free credit score check is a good to approach is follows:
- Low-interest rates: A personal loan is an unsecured loan, and thus mostly banks and non-banking financial institutions charge a high-interest rate starting at 10.50% p.a. However, if you take a loan from your friends or your relatives, then you may have to pay a nil or negligible rate of interest depending on your relationship with the concerned person. Thus, if you are taking a loan from your closed ones, it can certainly save you from paying huge interests and other charges like processing fees, legal charges, and prepayment charges etc.
- Flexible repayment methods: Another advantage of taking a personal loan from your family members is that there is no fixed tenure of repaying the loans. You can repay the loans whenever you have funds, however, it entirely depends on your understanding with the lender. If you have good terms with them, you can surely restrict yourselves from paying EMI’s at a fixed time period.
- Simple procedure: Unlike banks and other financial institutions you don’t have to fulfil basic criteria like filling an application form for applying for a loan, meet eligibility criteria for age and income, submit documents for identity, address, and income proof and verification for documents and application form, etc. if you take a loan from your family. The entire process of getting a loan from your family or friends depends on your relationship with the lender.
- Credit Score: As there is no restriction on when and how the loan is paid thus your credit score or credibility does not get affected if you take a loan from your known people and are not able to repay it immediately.
With easy, secure and flexible terms, there are benefits of taking a loan from your family and friends. However, there are certain disadvantages as well as that you must consider.
- No tax benefits: If you take a loan from a bank or non-banking financial institution, then there is always a benefit of getting tax deductions on loan amount and interest paid. For instance, a home loan borrower can get tax deductions up to Rs. 1.5 Lakhs on the principal amount of loan and up to Rs 2 Lakhs can be claimed on interest payment towards a home loan. Further, first-time borrowers can also get tax benefits up to Rs 50,000.
- Affects your relationship: As they say, never bring money in the relationship. Thus, the most significant disadvantage of taking a loan from your friends or family is that it can harm your relationship. If you are not able to pay the loan amount on time, then it may be awkward for you to meet them. In worse case scenarios, it can also result in disputes if you are unable to repay the loans.
What are the possible steps; thus, you must take to avoid any conflicts in your relationship?
These are some of the possible measures that you must take to prevent any issues in your relationship.
- It would be best if you don’t borrow huge amounts from your friends or family as it would be difficult to pay. Always take a loan amount that you would be comfortable to pay without any hassle.
- Also, if possible, you must prepare a written agreement about the terms and conditions of the loans so that there is no conflict. Further, if there is an obligation to repay the loan at a specified time, you would pay the mortgage with more responsibility.
- Lastly, you can take a loan from a bank or non-banking financial institution.