Do you think it is wise to consolidate several debts using a family loan? According to reports, some consumers will opt to borrow from family rather than max out a credit card.
If you consider the high-interest rate of credit cards, this actually makes a lot of sense. Borrowing from a loved one will not be as expensive. In fact, there are relatives who will probably not ask you to pay the money back with interest. There are also those who will only ask you to pay only a portion of what you borrowed.
Of course, these are only among the good scenarios. There are a lot of nightmare stories that involve borrowing money from relatives and even friends. You do not want this to happen to you and your relative. This is why it is important to be cautious when you are borrowing from your family or friends.
Without a doubt, it is more beneficial to borrow money from a loved one. But you need to do your research before you proceed.
Ways to consolidate several debts through a family loan
Before you approach your loved one and ask them to help you consolidate several debts, you need to know your options first. Since this is DIY debt consolidation, it is up to you to educate yourself about the right way to borrow money from relatives.
Here are three ways that you can get a family loan to consolidate your multiple debts.
The first option is to straight-up borrow cash from your relative. This is ideal for those with rich relatives who have a lot of liquid cash. You can calculate the amount that you have to pay and ask them to help you pay it in full. You can offer to pay them back with interest. Make sure that when you make your offer, you come prepared with a repayment plan. You need to convince them that you will pay them back. You can use a promissory note as a guarantee. This will increase the chances of them agreeing to lend you money.
Once they agree, it will make things easier because you can immediately take the money and use it to pay off your multiple credit accounts. In fact, you can head immediately to the bank or your creditors and lenders to completely pay off your debts. When you have paid off your debts, you will now focus on paying back the debt to the relative you borrowed from.
Offer a collateral
This will be the same as the first but you will be offering more guarantee to your relative. Instead of just using a promissory note as a guarantee, you can offer collateral instead. This collateral can be jewelry, the title of your house, or any other valuable item. The agreement is that when you fail to pay your loan, the family lender will take possession of that collateral. This is an effective debt consolidation plan because it will motivate you to pay off what you owe. At the same time, it will appease your relative since they are assured that they will get something whether you pay them back or not.
Co-sign a loan
It is also considered a family loan if you ask a loved one to co-sign a loan with you. This is a good idea if you have a bad credit score but your relative has a good one. By co-signing a loan with them, there is a high chance that you will be approved of a low-interest loan. When this happens, you can save a lot of money on the overall payment of your debts. This is especially true if you are consolidating high-interest credit card debts.
When you co-sign a loan, it means you and your relative will be equally responsible for the debt. Obviously, you will be solely responsible for paying off the loan because it was used to consolidate your debts. However, the lender can go after the co-signer in case you fail to pay off the debt on your own.
Tips when borrowing from family to consolidate debts
While borrowing a family loan can help consolidate several debts, it comes with a high risk. There is a possibility that things will feel awkward between you and the relative that lent you the money. As long as you haven’t paid your debt in full, something will always be hanging over your heads.
According to statistics, 46% of adults who allowed friends and family to borrow from them admitted that it did not end well for their relationship. Some said they lost the money borrowed and some revealed that it damaged their relationship with the person who borrowed from them.
When you are in a dire financial situation, you will be forced to resort to risky debt solutions. If there is no other way for you to borrow money to consolidate several debts, then go ahead and find someone who can help you.
Once you find that person, make sure you protect your relationship above all. If that person trusted you with their money, you need to respect them for that. It is important for you to find every way to repay them.
Here are tips that you can follow to ensure that the loan you will borrow to consolidate several debts will never ruin your relationship with the lender.
Be clear with the payment terms
First of all, be clear about how you will pay it back. This will help set the right expectations for the debt. Sometimes, everything starts out fine but then miscommunication happens and it becomes more complicated. Do not let this happen to you. Be clear upfront if you can pay the debt back in small installments or if you can pay it all at once but only after a long time. Your repayment plan will help the lender decide if they can risk their money or not.
Put everything in writing
It also helps both parties if you put everything in writing. Whatever you have decided should be written in black and white. It should also be signed by both of you. Make sure that you both have copies of this signed document as well. In case something happens in the future, you can refer to this document. You can even have it signed in the presence of a lawyer. This is ideal especially if you are borrowing a huge amount of money.
Discuss what will happen if the payment is not made
Finally, it is important to discuss the possibility of you not being able to pay it back. Anything can happen. You can lose your job or something really bad might happen to you that will leave you unable to pay your debt. You have to be open to that possibility and discuss what will happen. Can the lender go after your family? Do you have collateral that you can offer? These are practical questions that you need to answer. It will help clarify everything about the debt and will avoid leaving anyone hanging.