Using a family loan to consolidate debt is quite controversial. There are people who would advise against it. While it may seem like a safe way to borrow money to pay off debt, there is a lot of at stake than most people would realize.
You see, when you borrow money from a family, relative, or even a friend, you are bound to lose more than money. You are putting your relationship with that person at risk. If you fail to pay back the loan that you borrowed, that can negatively affect how you treat each other. The person that you borrowed from will feel betrayed by the fact that you are not paying them back. They would probably think that you do not value their feelings enough to put an effort into making sure that you pay them back.
And even if you were the one who borrowed the money, there is also a possibility that you will feel bad as well. If they cannot accept your honest and sincere explanation as to why you cannot pay them back, that can also hurt your feelings. Even if you get past this situation, your relationship will never be the same.
This is the reason why a lot of experts are advising against using a family loan to get out of debt. However, when asked about it, 82% of Americans (93% of young adults) said they are willing to lend a loved one some money to help them get through a tough financial situation. 66% are even willing to give money to a friend who is in need.
While there are risks involved, it is possible to use a family loan to get out of debt – as long as you follow certain rules about it.
Rules when using a family loan to consolidate debt
The truth is, the practice of borrowing money from a family member is not uncommon. In fact, a lot of people would rather borrow money than max out their credit cards. But even if a lot of people are doing it, that does not mean you should not be careful when you use it.
Since borrowing from a loved one can be a delicate situation, it is very important for you to approach it with a lot of caution. Here are the important rules that you have to follow if you want to avoid destroying your relationship with the person you are borrowing from.
Borrow the least amount that you need
First of all, you need to borrow only what you need – and the least amount as possible. This means you have to exhaust all your efforts to try and pay as much of it from your own pocket before you borrow money. The main reason for this is to lower what you owe your loved one. It will also help you pay off the family loan faster.
But that is not all. This will not just minimize the amount that you have to borrow. It will also give you a sense of responsibility for the debt that you are trying to pay off. Your loved one will feel more secure knowing that you are actively paying off your debt.
Sometimes, making the debt relief program difficult for yourself will instill the lesson in you about how hard life can be if you have too much debt. Even if someone was there to help you, it was still a difficult situation to get out of. Hopefully, this will subconsciously make you shy away from using too much credit in the future.
Put everything in writing
This is both for your security and that of the loved one you are borrowing money from. It does not have to involve a lawyer. You just have to write an official promissory note of how much you owe and how you will pay it back. Include in this paper your repayment plan. Will you pay every month? The most ideal plan is to make monthly payments. This will ensure that you will not forget about the money you borrowed. Once everything is written down, both of you should sign it. Have someone you know and trust be present as a witness. You can have the witness sign the paper as well. This is necessary to help you feel more accountable for the family loan. Not only that, it will give your loved one a sense of security – knowing that you are serious in paying back what you borrowed.
Give them collateral
Another rule that you can follow is involving collateral in the agreement. The truth is, you can consolidate without collateral. But if you want to prove that you are serious about paying what you owe, it makes sense to use an asset of yours as collateral. Your loved one will feel more secure about the agreement because there is a fallback in case you failed to pay the family loan. At the same time, you will feel more encouraged to pay what you owe. If not, you will lose that collateral.
Take note that doing these tasks will not guarantee that you will succeed in paying off the family loan you borrowed to consolidate debts. However, it will give you the motivation that you need to be serious about all your payments.
Tips to succeed in paying off a family loan
The effort to pay off your family loan is just the same as the other debts that you owe. However, this has to be treated with caution because your relationship with your loved one is also at stake. If you fail to pay what you owe, that can ruin your relationship. It will not just affect that both of you but the rest of the family as well.
Do not get us wrong. Consolidating debts can be beneficial to your family – but only if you pay it back. Here are some tips that can make the process easier to do.
Create a repayment plan together
Sometimes, loved ones who are generous enough to finance a family loan will tell you to pay them back when you are able. As gracious as this may be, do not agree. Insist on creating a repayment plan together. That way, you can explain to them what got you in the position that you are in. Maybe it was an illness that got you into a tough financial situation. They need to know about this. That way, if you encounter problems in the future that will force you to miss a payment, they will know that you are not just making excuses. The repayment plan should be something that you can afford. That way, they will not expect too much because you promised something you cannot deliver.
In case they do not have the time to discuss it with you, at least show them the repayment plan. That way, they will know of your plans to pay them back.
Give updates on every payment
When you begin the repayment, inform them of every payment. Just send them a text message or an email that you made a deposit. This will allow both parties to track the payments. It will also be your proof that you are keeping up with your end of the bargain. The updates will also establish communication and will help you stay open with each other. This will keep you honest, especially during times when you are having a hard time with payments.