In today’s economy, instead of looking to banks, more people are seeking alternatives like peer-to-peer loans, crowd-funding or family and friends when they need to borrow money. If you’re not a one-percenter — and 99% of you aren’t — you will probably need to borrow money at some point in your life. According to MarketWatch most Americans are only one paycheck away from the street. Yikes! They add that, “Faced with an emergency, they say they would raise the money by reducing spending elsewhere (26%), borrowing from family and/or friends (16%) or using credit cards (12%).”
We’re not just borrowing for emergencies, this is the age of startups and Entrepreneur reports that 38% of new businesses are launched with loans from family and friends — the average investment is $23,000. Peer lending, other types of personal loans and credit cards make up 57% of startup funding. Though it’s always been a universal truth that you should never borrow or lend money to family and friends, the truth is that it the only realistic option for many people. Especially as peer-to-peer loans are increasingly looking less like part of the sharing economy and a lot more like traditional bank loans.
Start with loan clarifications
So if you don’t want to lose friends or alienate family members, it’s vital to come up with some ground rules. The borrower needs to have a written plan for how they will repay the debt, the repayment schedule and some sort of collateral just in case. The lender also needs to know exactly how much they can afford to put up — and take into account that you may not get it back as soon as you’d like or (worst case scenario) at all. You also have to understand the tax laws regarding peer-to-peer loans. For instance, there is a minimum interest rate that you’re required to charge in order to declare the amount as a loan on your return. And for the sake of both parties, ALWAYS have a written, signed and (even better) notarized agreement.
The complexity of the loan
Peer loans can also affect your relationship in a number of unexpected ways. It could create a dynamic where the borrower feels constantly indebted and the lender feels owed, which creates resentment on both ends. If you can’t pay the money back, you could find yourself avoiding the lender. Likewise, the lender could wind up avoiding the borrower because they feel uncomfortable asking to be paid. It’s all too easy to put these kinds of loans at the bottom of your payment list because you know they’re not going to report you to a credit bureau or charge penalties. It’s essential to maintain open communication and never borrow or lend to someone with whom you have unresolved issues.
The Puddle app
And of course, there’s an app for that Puddle blends peer-to-peer loans with crowd funding and social media. It lets you create a network of trusted friends and family who all contribute to the pool. Each member can borrow up to 5x what they put in. However these are very short-term (3-6 months) loans.