I was extremely lucky when I went to grad school. I knew I was going to have to take out a pretty big loan and I just happened to be talking about it with my grandmother when she volunteered to loan me most of it instead.
$20,000 is nothing to sneeze at and 0.0% interested is definitely nothing to sneeze at. I know that loan made my life a lot easier and I’m very grateful for it, but here are some things to consider when borrowing money from your family:
- The Sweet Interest Rate – you will literally beat it nowhere.
- No Worries About Getting Approved – granted, student loans are alarmingly easy to get, but you don’t have to worry about submitting any personal information and how much you will be approved for.
- Negotiable Repayment Plan – I just told her than I’d be going back to work on X date, get my first paycheck again on Y date and would sent her $500 a month from that point on. She was fine with that. Honestly, when I started sending her double payments, she yelled at me and started sending me food, because she thought I wasn’t eating (which is madness, of course I was eating). On the flip side, when I switched jobs midway through repaying her, she told me I could take a month or two to get on my feet over there before sending her a check (which I laughed at because of course I had saved up two or three months of loan repayments before quitting the first job). Still, it’s nice to have that kind of forbearance built into family loans.
- Can Happen Quickly – we talked about this on a Tuesday and the money was in my bank account by Friday. This was really important to me because I was in the process of qualifying for a foreign visa and had to let the money sit in my bank account for 30 days before I could send in the application… which I’d put off a little too long and cut way too close. FYI, traditional loans also move pretty quickly (at least Sallie Mae does, that’s where my loan experience ends).
- Can’t Hurt Your Credit Report – no matter what happens with the repayment of the loan, it doesn’t hurt your credit score. It also won’t lower your credit score by suddenly taking on a huge sum of debt.
- You Have to Ask a Family Member for Money – there’s definitely a huge feeling of swallowing your pride when you take money from family that just doesn’t feel the same way when you fill out some applications and get money from a loan agency.
- The Lender May Feel They Have a Right to Comment on Your Finances – I loved my grandmother like crazy, but she was never a huge fan of some of my travels. In the middle of repaying her, I planned a trip to Peru with my cousin and her friend and my grandmother really did not approve of three girls heading off to South America alone together. She quizzed me left and right about the cost of the trip, reminding me how much I owed her until one day I said, “we agreed on $500 a month, right? I have never missed that payment. I usually pay you more. Do you want to renegotiate that amount? No? Then I’m going to Peru and you will still get paid every month.” It was arguably a little rude on my part, but in reality, she had no right to dangle my debt over my head to try to keep me from doing something I wanted to do. This would not have happened with a bank.
- They Could Have an Emergency and Come Up Short on Money – thankfully this didn’t happen to me, but if you borrow a large sum of money from a family member or friend, you may not know their financial situation 100%. I was well aware that my grandmother could afford this loan, or I wouldn’t’ve taken it. If you were not aware that whoever is offering you the money still has an emergency buffer themselves, I wouldn’t take it. Some people want to be so helpful, that won’t take themselves into consideration.
- Doesn’t Effect Your Credit Report – taking on some debt and paying it down does actually improve your credit report in the long run. For people who haven’t had credit cards, loans are a way to establish credit.
- It Can Be More Stressful to Pay Off – I hated the feeling of owing a family member money even more than I hated owing Sallie Mae. From what I’ve heard of other people who have borrowed from family, that’s a pretty common feeling. It never stops feeling personal.
Don’t get me wrong, I would do it again if I had to. The 0% interest rate is impossible to beat and there was always that comforting knowledge in the back of my head that if something really bad happened and I got sick or lost my job, she would just put the loan on hold until I could pay it again, no questions asked.
Ideally, the next time I need $20,000 though, I’ll either have it saved up first or it will be for a mortgage. Fortunately, if family loans aren’t an option for you, there are tons of ways to apply for scholarships, loans and other lending programs. If you’re from across the pond, in Scotland there are different ways of dealing with debt that will ease your monthly payments, one of these is applying for a protected trust deed.
What other ways have you guys funded your education, dealt with debt or minimized your payments?