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.
Hitting up family, friends for a loan [Mercury News]
(Photo: Getty)
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We lent my 22 year stepson $350.00 a year ago November when he lost his job and could not pay his rent. So far he has paid back about $200.00 of it and has since borrowed more, but has not offered lately to pay anymore of it back. A couple of weeks ago he promised to pay it back when he got his tax refunds in, which was last week and gosh, for some reason he has not called or come to visit.
I know for a fact he HAS paid his friends back money he owes them, guess they are SCARIER than I am! If he’d at least offer to pay it back I’d probably tell him just dont worry about it, but right now I still consider the loan due.
My husband says not to worry about it, that you shouldn’t loan money out if you are gonna get upset about not getting it back, but to me it is just the right thing to do to pay back money you borrow.
I think we’re talking about two different categories here. First, is the stereotypical “loans” to pay off credit card debt, medical bills, etc. The ones that you’ll never see your money again, cause rifts in the family/friendships, etc.
What the article might be talking about is mortgages or cars. This has happened with my family a few times, and was always approached as a business decision. For example, when my grandfather wanted to sell his house, his neighbor (a long time family friend) offered a simple contract where they would pay a lease and ultimately own it in 10 years. If they stopped paying, they would only own a percentage of the equity if the house sold on a traditional market.
If you have some intelligence and approach it the right way, this is a great way to cut out all these “evil corporations” we bitch and moan about all the time here. Its basically the same thing as craigslist of ebay, except you know who you’re dealing with and can judge if it is a sound deal.
My husband and I are loaning his parents money to pay off their home equity loan which will be paid back with interest by way of shares of equity in their home. This will allow them to stay in their home and not have to worry about it until they are done with the property by death or nursing home. It’s all being done with a legal contract, a lawyer, title search, a provision to increase the interest rate at certain intervals, etc. and will provide a decent return on our investment too. I think family loans are a great idea but you have to think like a bank and only loan to people that you are reasonably sure will pay the money back and get the paperwork done properly. His somewhat deadbeat brother doesn’t like the idea because it reduces his share of the estate. He fails to realize that if we don’t step in now, there may be no estate as they are house rich and cash poor. You should never plan your financial future around your parents’ estate because you just don’t know what’s going to happen.
Oh boy. I can’t agree with this advice at all, having been in (still in, actually) the position of family banker. I’m willing to guess there are some families whose relationships are strong enough, and whose members are financially responsible enough, to pull off a loan to one another, but it sure ain’t mine, and I doubt it’s the majority.
The bottom line is really know what you’re risking — and be prepared to lose the relationship with the person, not just the money.
@sabrinad:
lol “family banker” ! perfectly described my situation years ago. Being the only financially responsible one in the family can defintely be a pain.
One thing I have found out about having money (or just having a nice savings account & no debt) or just being financially responsisble ….. is that people often resent you for it. Family members, friends, coworkers etc. etc.. I dont go around telling everyone I have money, but savvy people figure it out after being around you for a while.
@SkyeBlue:
You sound very cheap. I can’t IMAGINE being that upset over your son, step or not, owing you $150 more. Just say it out loud. $150. It’s not that much, get over it. He’s not as established as you.
With my relatives? Hell na. I’ve seen what my parents have been through with my family. My brother doesn’t have a penny to his name and has the IRS (and my parents) knocking at the door of his pockets. An aunt and her two daughters all owe my parents sums of more than a thousand dollars each. Three more aunts and three uncles owe my parents money of unknown amounts as well from up to ten years ago.
I think I’m the only one in my family with good credit…
If one plans on paying back the loan, even if it’s not a terrific rate or terms, do it with an institution that will report your good behavior to the credit agencies. You’ll save more in the long run (eg., the rest of your life) with good credit.
If you don’t plan on paying back the loan, then by all means fuck over your parents, friends, whatever. It will take a lot for them to send you to collections and have that eventually get back to TransUnion, Experian, etc.
This is one of the worst articles I have ever seen posted on Consumerist. Like playing with explosives or day trading, lending or borrowing substantial amounts of money between individuals is best left as a thought exercise, 99.99% of people trying it will screw it and themselves up royally.
have a few comments on this — i have lent to friends quite a bit. now i only “lend” with expectation it won’t be paid back unless i nag which ruins the friendship (at least for me). so, any personal loan is a grant.
as for prosper/zopa etc. — i really commend propser on transparency. however, that transparency has revealed P2P loans to be an unworthy investment opportunity. the returns are not there or, more accurately, the returns don’t justify the risk. for an uninsured vehicle to offer the modest returns (and ever-increasing risks given current markets), prosper and zopa are not good places for my money.
if you really dig into this, you’ll understand why banks behave like the do and why banks have low PE ratios. lending is not easy and people, ESPECIALLY in US, have a terrible attitude toward credit and bankruptcy.
prosper/zopa could work in countries where credit/bankruptcy still carry a stigma. unfortunately, nobody in such countries in going to put an honest profile online looking for money.
it’s time to buy yuan illegally (or hedge against US treasury notes) — either will work.
My fiance’s father loaned the both of us $1, 500 (AU) towards the end of last year for a car. We were honest and upfront: we might not be able to make payments every pay day, but it will get paid. He accepted that (and doesn’t need the money anyway) and it’s functioning well. A third paid off it already
I agree, though, unless you’re prepared to lose the money, don’t lend it. I made that mistake with my parents. >.<;
Not a hard and fast rule, and I hope not perceived as off topic, but have you noticed how often money problems seem to run in families with maybe a only a fluke single responsible money steward every generation or so? And then other families where they all seem to have it together—not necessarily rich, but are responsible with money? I’ve seen some marrages go rocky if the lovebirds are raised in these two different types of families with different spending and borrowing styles.
Well now, Judge Judy and Judge Joe Brown both say you gotta be a moron to borrow money from family, LOL.
If you are the person lending, then you’d better get that promissory note signed in hand, and prepare for fireworks down the road.
Uuuh. No. Ive been burned loaning money. Yet, I was the asshole when I politely asked for repayment when it was due. From Hamlet by William Shakespeare; Polonius speaking: “Neither a borrower, nor a lender be; For loan oft loses both itself and friend”
Don’t worry about my family, they’re way ahead of the curve on this one.
I can’t believe Consumerist would even post this knowing how bad it can turn out. Thankgiving dinner sure don’t taste the same when you’ve loaned out money to family. My odest brother has owed me money for a loan to help his business three years ago. He is still in business, but I have yet to see a dime paid back! DONT DO IT! SHAME ON YOU CONSUMERIST!
Don’t be ashamed to say “No” to friends or family asking for a loan.
Horrible advice… Seriously. Do you not watch the court shows on TV.
I have had to say no to even close friends – It’s really hard, and sometimes in the saying no you lose a friend anyways. I will loan quite happily to my mother, knowing that no, I may not see the cash again, but I will be repaid in some style – be it her buying something for me that I need at a later date, or helping me move, or whatever. Nothing you say could convince me to loan money to any other member of my immediate family, ever. I barely get paid for working at the family business (which is another AWFUL idea, btw.)
@alphafemale: I would agree. If you can afford to loan it out, and won’t miss it if it won’t come back, then give it. We just did that for my wife’s brother. It was a small enough amount I won’t miss it. The other thing that helps, write the check out to who the money will go to so they’re not tempted to spend it on something else. I wrote it out to the lawyer he needed directly.
Obviously, this also depends on your family dynamic. Some families are more open to helping out than others.
Also, another option I haven’t seen mentioned is the repayment can get flexible. I know when I was younger I needed money to fix my car, but I wasn’t making much. My grandfather lent me the money, and I worked it off by doing a bunch of work around the house he was no longer able to do. As an added bonus I ended up getting to see him much more often than I normally would’ve.
@nevergod: Great point. Sorry, Carey, but so many of your articles seem to fall under the “Bad Idea Jeans” category. This would be one of them.
i normally side with those saying “bad idea”, but this seems to be a bit different than the “i need cash fast, can you help me, mom/dad/sis/bro” loan. this seems to be more of a structured investment where the applicant approaches their relatives with terms for repayment. in a case like this, i would consider it.
a big part of the problem i have with the “family lending business” is that repayment is often not discussed beforehand & everything is done on a handshake. most of the ill-will is really caused by a lack of communication between the two parties about satisfying payment. if that all can be hashed out beforehand, this could be a viable method for responsible individuals.
Doesn’t anyone ever watch Judge Judy? Loans made to deadbeet relatives are just not worth it. It usually ends up with the borrower somehow being able to magically turn that loan into a gift.
@mac-phisto: Agree; there’s a difference between “i can haz beer cash plz?” and a specific loan agreement between two mature and responsible individuals.
Some relatives, and in some situations, you should expect if you “lend” the money it will probably not come back to you. But in other situations, low-interest or no-interest family loans can be an enormous lifesaver. One of my cousins couldn’t qualify for financial aid for college, so he borrowed money, on very low-interest terms, from my great uncle. My cousin was an extremely responsible young man (who was raised by a widowed single mother, who was widowed VERY young, and in the early 60s, and she had only a high school education — money was a major issue), and my great uncle (who had no children of his own) could afford to lend the money.
I’ve short-term borrowed from parents when a bill arrived before the money intended to pay it (like ALL THE TIME in grad school, tuition bills beat financial aid checks by at least 60 days, it was horrific). And I’ve certainly also lent to siblings, though much smaller potatoes.
It’s really an issue of knowing how responsible the person in question is, and whether you can afford it if they “default.” AND what the money is for — is this a bridge to help them when a large bill beats a check and they expect to pay next month? An investment in something (college education, computer for an ebay entrepeneur) that will improve their overall financial position such that repayment is possible?
If I lent money to my sister to make rent, and she “defaulted” (which I can’t imagine her doing short of utter catastrophe), I would just consider that part of being a family and helping family members who need help. (Also, I suspect if something like that happened and my parents found out, they’d probably make at least partial repayment to me so THEY’D be out the cash, not me.) Now, if it happened more than once, it’d be time to close the bank.
…And I think Dazette is right, and that those of us okay with borrow/lending intrafamilially seem to be financially responsible with financially responsible relatives, and those who think it ruins relationships seem to have dealt with family/friends who weren’t!.
Do not loan family/friends money. I know from personal experience, something will go wrong and the relationship will suffer.
If they are only asking a little, and you have the money to spare, then gift it to them or have them work it off–but if they need a loan chances are they are going to have a hard time paying it back on schedule.
Family should help family — but I just think you have to be willing to eat the money and give it because loans do go bad between family members.
Don’t Be Ashamed To Ask Friends Or Family For A Loan. Just make sure you:
A) draft a contract,
B) notarize it,
C) pay everything on-time and with a check (not cash or untraceable money order), and
D) don’t end up on The People’s Court like an idiot with no proof, have Judge Milian yell at you, and lose your case
Oh, and your boyfriend/girlfriend/fiancé/fiancée is neither “friend” nor “family” when it comes to loans! :-p