Cherise Schwartz dreaded approaching her uncle for a $15,000 loan.
Her cleaning business in Bethel Park, Pa., faced a payroll crisis as the Christmas holiday season approached. With double-digit interest rates on personal loans and a Small Business Administration loan taking more time than she had, she called her uncle John Dickey.
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Dickey, a tech entrepreneur, agreed to loan Schwartz the money if they used Namma, a platform that structures loan agreements and sends repayment notifications.
“This way, it’s Namma sending reminders to pay, and I don’t have to nag for it,” Dickey said.
More people have turned to friends and family for loans, financial advisers say, since high interest rates have made it more expensive to borrow money.
Banks are also tightening lending standards in all categories of consumer loans, including credit cards, personal loans and auto loans, according to the Federal Reserve’s April survey of loan officers. Rejections for credit cards in February rose to 35.3%, from 32.1% in October, a monthly New York Federal Reserve survey found.
Half of Americans who applied for a loan or financial product since the Fed began raising its benchmark interest rate in March 2022 have been denied, according to a survey by Bankrate, a consumer financial-services company.
Turning to a relative or friend can be less financially painful for borrowers, and, in some cases, profitable for the lender. A $10,000 or larger loan from a relative has to charge a minimum interest rate of 4.97%, under Internal Revenue Service guidelines. The average rate on a 24-month personal loan from a bank was 12.49% in February, according to Fed data.
Still, relationship-based loans come with inherent risks, and financial advisers generally recommend avoiding them. Roughly a third of Americans have had a falling-out over money, and the most common reason was because a loan was never paid back, according to a November survey from price-comparison platform Finder.
“Lending money puts your relationship as collateral for the loan, which is risky and can lead to resentment,” said Chris Hostetler, a financial adviser at Hilltop Wealth Advisors in Durham, N.C.
The friends and family plan
Platforms and apps like Namma, Pigeon and Zirtue have facilitated more than $100 million in loans between friends and family since 2020, offering practical tools and assisting with some tax record-keeping. These three services have reported low default rates, a trend financial advisers attribute to the accountability fostered by close relationships.
These loan apps and services can turn verbal agreements between friends and family into official, written contracts. They also keep track of payments and terms, and assist in adhering to other IRS guidelines, such as establishing a fixed repayment schedule.
Family members can define and negotiate terms such as the loan’s duration, interest rate and repayment schedule. Services such as Namma recommend staying within state-set usury laws, which cap what a lender can charge for interest.
Namma creates loan contracts and, for a $3.99 monthly fee paid by either party, provides additional features like payment reminders and transaction record-keeping.
The service supports relatively large average loans—typically between $16,000 and $17,000, said its founder, Sonal Bagga. The site has facilitated more than $4.8 million in loans since its founding in 2020, she added.
It doesn’t manage the actual transfer of funds, leaving users to arrange payments through other means and report them back to the website.
Schwartz sends her uncle $300 on Venmo each month, and her uncle documents each payment on Namma.
“It allows us to focus on our family relationships rather than the loan itself,” Schwartz said. Dickey offers repayment flexibility. He recently suggested that Schwartz skip a payment for a family vacation, without any penalty.
Small loans
Zirtue, a mobile lending app, caters to the needs of users seeking smaller loans, with an average amount of $400. The loans are typically repaid within six months, said the app’s founder, Dennis Cail.
The app removed interest-setting options because they were rarely used among loved ones, Cail said. It charges a 3% to 5% transaction fee paid by the lender, which is repaid by the borrower on an agreed-upon repayment schedule. The app also lets family and friends set up loans to pay their mobile phone and energy bills.
In March, Gregory Panaccione, a 29-year-old auto glass installer from Brookhaven, Pa., was confronted with an unexpected $3,000 expense for a clutch replacement in his vehicle. With limited options, he approached his father for assistance.
“I never know if my dad will say yes,” Panaccione shared. “He usually makes a big stink about it before agreeing.”
His father had lent him money for years, but this time his father suggested using Zirtue. He set up a repayment plan through the app, committing to approximately $100 a month over 36 months with no interest.
“It helped me out of a tough spot,” Panaccione said.
Lending between peers
Pigeon mostly facilitates loans among acquaintances.
“It’s for bridging that trust gap with your cousin or colleagues,” said Brian Bristol, founder of Pigeon.
The app allows users to create digital loan agreements with customizable terms, including amounts, interest rates (if any), and repayment schedules. Customers are billed at either a $4.99 or $7.99 monthly rate for access to additional tools.
Pigeon charges for loans over $10,000 or those extending beyond an 18-month repayment period. However, Bristol plans to adjust these terms soon, lowering the free trial to 12 months and the loan threshold to $5,000.
Even with the growth of these apps, financial advisers say those lending money should probably consider the money as a gift—if you can afford to go without it.
“If it’s a gift, then getting any money back from them is a treat,” said Tommy Lucas, a financial adviser at Moisand Fitzgerald in Orlando, Fla. “If they can’t get it elsewhere, there’s a good amount of risk that it may not be paid back.”
Write to Dalvin Brown at dalvin.brown@wsj.com
