Taking a private loan from friends or family can be a win-win proposition, not necessarily a shame-filled dish with a side order of failure. Private loans are an ideal way to reduce the amount you need to borrow from a bank—instead of paying loan application fees, processing fees and higher rates, you can save money while offering attractive yields to your friends and family.
Three USA Today money columnists argue that the key is structuring the deal so that everybody wins:
…if you are looking at mortgages with interest rates hovering just below 7 percent while your parents are struggling to find a CD or other safe investment that pays more than 5 percent, you can satisfy everyone’s needs by structuring a private loan in which you make monthly repayments at 6 percent.
If you still blanch at the thought of asking for a private loan, approaching it as a business proposition may be a wise strategy. Suggest setting up a time to talk, even if you see your parents (or brother or old roommate) regularly and the formality seems odd.
If you get a positive response, prepare a one-page list of things to discuss, including how much you want to borrow, the interest rate you’re offering to pay, your proposed repayment schedule, the legal and financial protections you’ll offer to the lender and how much you have available for the down payment for the item you are looking to finance.
Of course, money issues can ruin relationships. This is only a viable option for financially mature people who are confident they can repay their loan, and are looking to do more than pay off last month’s credit card bill. If you like the idea of bypassing banks but don’t want to potentially sully your close relationships, consider person-to-person lending through Prosper.