Is Borrowing Money From Family a Good Idea?

With the unemployment rate around 9.5%, it's no wonder that many people are turning to their families to borrow money. In a survey by the Pew Research Center, forty-two percent of respondents said they had to borrow money from friends and family in 2010 to pay bills.

While borrowing money from loved ones may seem like a good idea, as family and friends don't normally charge interest rates, money trouble can lead to tension with negative consequences for your family life. Are you ready for awkward conversations, sibling rivalries and arguments at the dinner table?

Furthermore, family borrowing could put the lender's retirement in jeopardy, according to editor of The LendingTree blog, Nicole Hall.

Although it may seem impersonal, Hall suggests setting up payment schedules ... and even interest rates:

"Remember, this is a business transaction, even though with family involved there can be more emotion. At the same time, you have to protect your own financial situation."

Erika Safran, a certified financial planner from New York, agrees with the idea of making the loan process more formal with the emphasis on charging interest and setting up a payment schedule. CNN.com has more on making the exchange formal:

Safran says lenders, particularly parents, should carefully weigh the circumstances of a loan request before agreeing to loan the money. For example, if the relative has credit debt, but continues to buy expensive items, a loan will not solve the root problem.