Is It Better To Pay Off A Debt Using A Personal Loan Or Borrow From Family & Friends?


If you’ve just lost your job or have a few utility bills piling up, you may consider asking a friend for financial help. This option can seem cheaper and easier to get, but it may jeopardise your relationship.

We understand how stressful it is to face financial difficulties. It becomes even tougher when you don’t want to ruin good relations with your friends and family.

If you are unsure of the next step, read this article.

We compare paying off a debt with a loan with borrowing from your loved ones. We’ll also discuss some of the best personal loan solutions for your needs.


What Should I Consider Before Borrowing From Family Or Friends? 

Let’s tackle the factors that affect the decision of borrowing money from a relative or friend. We’ll analyse all the facets, plus offer some tips and tricks to ensure everything goes smoothly.

Deciding The Repayment Plan For The Loan 

When you borrow a smaller sum of money from a loved one, the first instinct is to reply, “Thanks. I’ll pay you back next week / at my next paycheck.”

As you probably noticed, even for meagre amounts, the instinct to reassure your friends still kicks in. So, when you’re borrowing more massive sums, you need even more transparent terms.

These terms should include:

  • How long it will take you until you repay them fully
  • The monthly or weekly sums you agree to pay
  • Whether they’ll charge interest or not

It might seem weird to talk about these details with a friend, but they’ll save your relationship in the long term. Stick to them if you don’t want to ruin your friendship with mistrust.

Things might get a little awkward if your friend has to ask you for money instead. 


What If I Cannot Repay The Borrowed Amount? 

Not being able to repay the borrowed amount is the elephant looming in the room when you discussed your loan terms. You’d be surprised how often that happens.

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One of the reasons is that people don’t see the importance of a loan between friends. You may not feel the same tension or urgency to reimburse the loan because:

  • You have no pressing personal loan interest rate
  • The instalments are acceptable
  • The friendship is strong

Conversely, even the best personal loans from licensed moneylenders have some strings attached, which lead you to prioritise them.

The solution is simple:

1. Make a realistic repayment plan and stick to it no matter what.

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2. You can negotiate late payment penalties for extra insurance.

3. Be upfront when you can’t reimburse an instalment instead of just assuming your friend will be ok with this.


What If Your Friend / Family Needs The Money Urgently? 

Although you and your loved one have agreed on a loan tenure, life can mess with your plans. After all, people don’t function the same as licensed moneylenders.

For example, your friend could have something terrible – or fantastic – happening to them. They might go through retrenchment, an unplanned pregnancy, or decide to get a BTO.

As their financial commitments fluctuate during your business relationship, you might feel the pressure rising. The same friend you asked for a loan when banks rejected you may ask for the same favour in the future.

The most practical solution is sticking to the plan you’ve crafted, but that doesn’t guarantee that your relationship will survive. That brings us to the following section:


Are You Willing To Risk Your Relationship If You Fail To Repay? 

As we go on, we remember…
All the times we had together…

Loans between two friends may work when:

  • The loan amount is small
  • The lender has enough funds
  • Both parties can take a business approach to reimburse the loan and separate the debt from their friendship

Conversely, a loan between friends won’t work if your friend raises an eyebrow each time you purchase an expensive dish at the restaurant or buy a new pair of shoes. Even if you’re following your repayment schedule, your friend or relative might still pester you with annoying questions about your private life. They might even demand early payment out of jealousy or fear that you’re tricking them.

Another good example is when your friend needs that money for an essential milestone in their lives. If this milestone is something they could have planned, such as a new house loan or their studies, your relationship will be even more strained.

After all, your friend will ask you to choose between your needs and theirs.

So, ask yourself whether you’re willing to risk your relationship over this loan. You may not want to consider this now, but experience has shown that debts between friends are risky.


Will You Feel Emotionally Indebted To Them?

When you borrow money from a friend or family member, you might feel emotionally indebted to them. That leads to a guilt-based behaviour that can put a lot of stress on you. The eventual result is that your friendship might break under pressure, too.

When banks refuse a loan that you feel has a significant bearing on your life, and a friend borrows you this amount, your friend won’t become your “lender.” They’ll become your life-saver.

As such, you might feel indebted to do all sorts of things for them even when you don’t want to. You might end up babysitting your friends’ toddler each Saturday or driving your annoying aunt to all her shopping.

Although you want to show your gratitude at first, exaggerations are a trap that will spiral out of control.


3 Alternatives To Borrowing From Your Family And Friends

As we’ve discussed in the previous sections, borrowing money from your friends and family entails unforeseen emotional consequences.

The only time when this doesn’t happen is when you’re both ice-cold in separating this loan from your relationship.

If you don’t want to strain your friendship, consider some of the best personal loan solutions below.

Alternative 1: Personal Loans From Licensed Money Lenders 

If you have a poor credit score or a low-income level, a bank might not approve your loan request. However, licensed moneylenders in Singapore have higher approval ratings and customised loan packages.

Besides, these agencies are legal operators under MinLaw’s authority. Their personal loans are usually rather affordable and most importantly, can be disbursed within hours.

Benefits of getting a personal loan:

  • Moneylenders will craft the best personal loan for your needs, depending on your income and needs. Thus, they’re a worthwhile choice if you need a more massive amount and more flexible loan tenure.
  • Personal loan interest rate is limited to 4%/ month. Staring from this interest cap, most legal lenders in Singapore will craft affordable repayment schemes.
  • Surprisingly, personal loan interest rates are lower than that of credit cards.
  • Borrowers are given more time for repayment and greater flexibility. They can usually negotiate with the licensed moneylenders in Singapore for the best personal loan.
  • Many money lenders in Singapore don’t place too much significance on your credit rating.

Overall, getting a personal loan is not that expensive. You can use a personal loan calculator to calculate the interest rate as well as the loan repayment amount.

Alternative 2: Credit Cards 

Credit cards are far from the best personal loan solutions, but they’re a common choice in Singapore and abroad.

Do avoid this if you can though. Their interest rates snowball easily and you will soon find yourself drowning in credit card debt.

One reason is that credit cards are very convenient – always there in your wallet.

The problem with credit cards, though, is their high interest rates. Interest gets up to 25% per year.

If you don’t repay your balance in full each month, accumulated interest rates snowball out of proportion. While your credit card allows you to reimburse a minimum sum each month, this option isn’t perfect in the long term.

Alternative 3: Pawning Your Valuables 

Ever seen ValueMax or MoneyMax at MRT stations? Those are legal pawnshops.

Pawning your valuables is a questionable alternative, although it might work if you can redeem your pledge quickly. Here’s how this works:

If you have a branded Hermes bag or some electronics, the pawnshop will loan you about 60-80% of your item’s worth. Next, they’ll give you about six months’ tenure, with a 1% interest during the first month and 1.5% for the subsequent months. Each instalment increases your loan’s duration by another six months.

Pawnshop personal loans have some advantages:

  • You don’t have to worry about a meagre credit rating.
  • You’ll get your money instantly with no paperwork.
  • You can default on your loan with no strings attached, other than losing your pledge.
  • After the pawnshop sells your assets in case of a loan default, you get the extra cash.
  • You won’t have to deal with accumulated debt.

But consider these drawbacks as well:

  • Your interest rates may snowball.
  • Even the best personal loans from pawnshops put you at a loss.


In Conclusion 

Borrowing money from family and friends is a double-edged sword.

If you are not prepared for the consequences, getting a personal loan from a licensed moneylender in Singapore might be the better option.

While it might be difficult to find the best personal loan rates, there are free search engines that can help you compare and narrow down the choices. Make sure to do up your budgeting before entering a loan contract to ensure timely repayment!