What is a friendly loan and how does it work?

Father and daughter sitting at a table together, discussing a friendly loanImage: Father and daughter sitting at a table together, discussing a friendly loan

In a Nutshell

A friendly loan is a personal loan that you receive from a friend or family member. These loans are often informal, but taking the time to write down a loan agreement can help both you and the friend or family member set expectations.
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Friendly loans are simply the sharing of financial resources between family members or close friends.

Borrowing from friends or family may be an option if you need a loan to get through a financial emergency, pay for school or finance a purchase.

These friendly loans are outside the traditional lending sphere, meaning you’re not facing the credit checks and formal applications you’d find when borrowing from a traditional lender.

But keep in mind that friendly loans are not without challenges and potential pitfalls. We’ll review how a friendly loan works and what you should consider before pursuing one.

What is a friendly loan?

Friendly loans can be one-time loans or repeated loans spurred by a financial emergency or specific financial need. You may also see them referred to as “family financial exchanges.”

Because loans from family and friends are often informal and outside the financial system, there are no set rules for how they work. Depending on the situation, those involved might not write anything down and the expectations for repaying these loans may not even be discussed.

But the Consumer Financial Protection Bureau strongly recommends that the terms of a friendly loan be agreed upon and documented — or at the very least, that the lender and recipient have an open conversation about the loan, how it will be repaid and what the money will be used for.

How common are friendly loans?

Friendly loans are common in the U.S. As many as 1 in 5 American adults receive financial assistance from friends or family, according to 2021 research from the CFPB. And up to 1 in 3 adults assist others, the agency found.

These loans, which are commonly between parents and their adult children, can be made between any two family members or friends and include siblings or even roommates. 

Sometimes, people may turn to friends or family for an emergency loan. Other times, these loans are a last resort for people who don’t have other options to borrow money. Friendly loans also may be used to cover monthly expenses for a short period of time, pay for school or to help buy a home.

Advantages and disadvantages of a friendly loan

Because friendly loans are often informal, they have significant advantages over a loan from a traditional lender. You may be able to receive loan funds quickly, through cash, check or financial app.

If you need money but struggle with weaker credit, a friendly loan may be an option to seriously consider.

But the downsides of a friendly loan can be significant. A loan can change the relationship between two family members or friends, particularly if the borrower has trouble paying the money back.

The guilt and shame the borrower may feel if the money can’t be repaid may be more potent than if the borrower defaulted on a loan from a traditional lender.

How to set up a friendly loan

To have the best chance of a good experience for both lender and recipient of a friendly loan, it can help to treat the loan seriously and create a loan agreement or promissory note.      

Write down the details of the loan, including how much money is changing hands, what that money can be used for, and how and when the money will be paid back.

You’ll also want to have a frank conversation about expectations once the friendly loan is given. You and your friend or family member may have different ideas, so getting on the same page will help the arrangement work better for everyone involved.

A discussion should cover questions that include …

  • What happens if you have trouble paying the money back as planned?
  • When will the financial arrangement be reviewed?
  • Is this a one-time loan or will you ask for more support?

Keep in mind that while this conversation may be helpful for getting started on the right foot, the details and expectations discussed may not have the force of law.

What to consider before borrowing from friends or family

If you are considering asking a friend or family member for a friendly loan, there are some important questions you should consider first.

  • What does success look like for this loan? This includes what will have to happen and what you will need to do for both you and your friend or family member to have a positive view of the arrangement.
  • Will this loan affect our relationship? Mixing family ties and finances can be touchy. Think carefully about whether this loan could irreparably damage your relationship.
  • What will my friend or family member expect from me? If you receive a loan, you may be expected to take on more obligations around the family home, for example.
  • What other options do I have? Carefully weigh the pros and cons of asking a friend or family member for a loan before moving forward. If you have other options to help with your financial situation, you’ll want to consider those as well.

About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews in Wilmington. In those roles,… Read more.