The Pros and Cons of Borrowing from Family | brokeGIRLrich
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:
Pros
- 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.
Cons
- 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.
Seriously, Nan, if you’d talked me out of Peru, I never would’ve learned how truly terrified of heights I am (that’s me clinging for dear life to the side of the wall).
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?
I’ve borrowed from my dad before. Before borrowing the money, I made sure that he knew I would make regular payments and that I wanted to pay him interest (at a rate that was beneficial to him, but still cheaper than me borrowing from the bank).
I did however find it stressful, knowing I owed my dad a lot of money. The positive thing about that was it pushed me to pay him off quickly. 🙂
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I agree. I made it a priority to almost always send double payments because it felt so incredibly lousy to be in debt to someone I loved. With Sallie Mae, I hated being in debt and still worked fast to pay that part off, but it didn’t have the same intensity.
Mel @ brokeGIRLrich recently posted…The Pros and Cons of Borrowing From Family
I have from my parents and it can be stressful. I would not borrow from a family member again. My mom has lent to some of her grandchildren (not mine kids) and it has caused stress and strain on their relationship. I’ve suggest she either just consider the money a gift or sit down with the grandchild and come up with a agreeable repayment plan.
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I actually pretty sure she did sort of think of it as a gift… or she just didn’t think I would repay it and was ok with it. Not all of my cousins or my brother are always all that responsible. But that was never even an option in my mind.
The agreed upon repayment plan made everything much more black and white.
It was supposed to be a loan and be repaid, just not going so well.
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I think it’s really important to do what you did and specify a payment schedule and timeline.
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Haha I love that picture. I am TERRIFIED of being on the edge or anywhere near a cliff. I am extremely clumsy and tend to fall, so it’s just a bad idea for me haha.
I have never been loaned money, but I have loaned money to others several times. They’ve mostly been fine (such as loaning money to my sister so she can go to college – she’s already paid me back), but there has been one time where I lost a great deal of money by helping out a parent.
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I’m pretty sure if I were ever loaning to a family member, I would just assume I’d never see it again.
I am not crazy about loaning money to family, mine specifically. You live and you learn. I think it honestly varies from family to family whether it’s a good idea or no.
I wrote a post called “Keeping it in the family”, on this very topic. People seem to fall on one side or the other of this debate. I have lent to several family members, and borrowed money from my parents…….with absolutely no problems. For me, it was important to have both parties write down our expectations……including a repayment schedule and consequences. The other thing, is only be involved with people you trust and respect. I think we all have addicted or dumb relatives who can’t help but default. Tip-Don’t lend to them.
-Bryan
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I haven’t borrowed money from family before, but I’m not opposed to the idea of borrowing or lending. I think I’d worry the most about #2 on your “cons” list. I don’t like to feel as though anyone is peering over my shoulder! But, sounds like this was a great situation for you!
Yes, it was definitely worth all the cons!
I don’t lend money to friends or family. I only give money. My relationships are too important to risk over money. My grandpa has a lot of money and he doesn’t spend it. Buying things for our family and our kids makes him happy and it greatly helps us, so we love it, but it’s always given. Never borrowed. Great article!
Kalen @ MoneyMiniBlog recently posted…Doing Your Debt Homework: 3 Strategies to Plan Ahead for Student Debt
That’s a great approach. As the receiver (especially for that much money!) I felt good about paying it back.
My grandparents on that side of the family were pretty well off and always loved spoiling me and my brother. Even as I got older, I realized that my grandmother really just liked going shopping with me for the afternoon. I felt like a mooch for years until it kind of clicked that her spending $50-100 in a day twice a month with me or so was nothing to her and an activity she liked doing. And I really liked spending the time with her too, so it was a win win for everyone.
Ditto on con number five.
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Whoa…that must have been a very long way down with you clinging to that wall 🙂
I have borrowed and lent to family members countless times…so far so good. Infact, i think it has deepened our relationships since we meet from time to time to discuss finances and life in general.
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I can see how it could deepen relationships since it would sort of take the taboo out of a lot conversations.
I have borrowed small sums from family, nothing large. I recently lent my parents £600. I wish I hadn’t. It is very awkward having to ask when they will be paying me back.
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