Borrowing from family is a great deal. A comedy of errors that can be manipulated to the borrower’s advantage.
Today I look at why family borrowers should get loans from other family members while they are hot before parents start demanding real loan terms and a risk adjusted rate of return on the money.
The eight reasons family loans are hot:
- There is no bank that would offer the loose loan terms that a family member will offer. Pay me back when you can and late fee, what’s that? are common terms in a family loan agreement.
- The Bank of Mom and Dad will sometimes offer interest free financing. Your credit score, past loan defaults and a negative real return on their money are of no concern to your parents. They act like the Queen of Sheba sometimes with wealth to burn. I’m sure that even she had a court treasurer to make sure the subjects paid back their loans with interest.
- You usually don’t need a good, value added reason for borrowing from family. They usually only care that your self esteem isn’t hurt by rejecting your loan request. Never mind that this easy access to credit may warp your expectations in adulthood as real lenders want to talk about foreign concepts like collateral and maturity dates.
- If the local branch of the Bank of Mom and Dad is closed, there are often willing lenders at satellite family branches including Brother and Sister Credit Union and Auntie’s Savings Bank. Be sure not to use your parents as a credit reference after they reject your loan application.
- Your parents usually hold down full time employment which leaves little time or ambition to do their job as collection agent or repossession specialist. There is spotty tracking of repayment and enforcement of loan terms. Collection is almost impossible because of the emotional ties and sending you to Dad’s debtor prison is out of the question.
- Parents have authority over you which clouds their judgement when you ask them for a loan. Power sometimes fogs the lender’s brain.
- Many family members did the data flush after high school so won’t remember the important lessons that the revolutionary war taught them about borrowing although you might think some of them are old enough to have ridden with Paul Revere.
- Your parents may lecture you and try to act as your borrowing coach even though they may have a sketchy credit history and no professional borrowing experience except for their home mortgage and auto loan. You can often pretend to listen to them and mine their experience but then go your own way.
Of course, I’m being sarcastic with my points above. I don’t promote in any way taking advantage of your family. If you follow the examples above you will most certainly set yourself up for massive disappointment when you try to borrow from grown up bankers and hard money lenders in the real world.
Will you do yourself a favor and get a great borrowing education by learning from someone who’s done it before in the real world? The best lessons are learned from others’ mistakes.
- Five Things your Parents Wish you Knew about Borrowing Money From Them (proborrower.wordpress.com)
- It Takes a Community to Repay a Loan: The Lessons of Prosper.com (dailyfinance.com)
- A Guide to Personal Loans (creditloan.com)