Tips For Borrowing A Debt Consolidation Loan From Friends Or Family


According to data from the Federal Reserve Board Survey of Consumer Finances, personal loans given by a consumer’s family members or friends amounts to a staggering $89 billion each year.

But let’s face it: Asking family members or friends for money can be slightly uncomfortable at best, and downright awkward at worst. In fact, the conventional wisdom seems to urge against it, as introducing money into a personal relationship can strain or even irreparably damage that relationship if things go awry.

Nevertheless, personal loans are an important option for many consumers who are looking to pay down debt by consolidating their various loans: After all, taking out a low-interest personal loan from a family member can be a great way to avoid opening another credit account, which can steep you even further in debt. Not to mention, it may be one of your few options if you have bad credit or are unable to secure a bank loan.

When accepting a loan from a family member, friend, or colleague, it’s okay to expect some empathy and flexibility. Still, it’s important not to let the familiarity of your relationship placate you into skipping certain essential steps that will ensure the process runs without a hitch. As such, here are a few tips to make your borrowing process as seamless (and conflict-free!) as possible when you turn to your personal connections for help.

Confirm that your lender can afford the loan

It may seem obvious, but borrowing from someone who is cash-strapped is not a great plan. Keep in mind that your friends or family members may be eager to help you, but if they are facing the same financial difficulties that you are, then they likely aren’t the best lenders for you. Initiating a financial agreement with a friend or family member who wants to help – but ends up having to pull out of the deal due to financial hardship – can unnecessarily strain or even damage your relationship, while leaving you in the same difficult situation you’re working so hard to resolve.

Agree to pay at least some interest

Although most personal loans carry lower interest rates than traditional bank loans, you should ideally offer to pay at least enough interest to account for inflation – particularly if the repayment plan is long-term. This may not be as vital for a shorter term loan, but be sure to offer to pay your lender even a small amount to make the transaction beneficial to both parties.

Always, always, always put it in writing

Just as you would with a bank or other lender, memorialize your agreement in writing. At an absolute minimum, include the amount to be borrowed, the interest rate, the repayment timeline and terms, and the lender’s recourse if you default (for instance, will you offer any collateral to secure the loan? What penalties, if any, will you face for nonpayment?). Spelling this out in writing can substantially minimize conflicts down the road.

Keep written records of your payments

Even when dealing with family members or friends, it’s still important for you to keep a record of what you’ve paid, and when, in case a dispute arises. Keeping written records doesn’t mean that you don’t trust your lender: It simply means that you can ensure there is a paper trail backing up each and every transaction – a vital step in any financial plan.

When possible, accelerate your payment schedule

If you find yourself earning a bonus, raise, tax refund, or another windfall, consider funneling the extra cash into the loan principal. Taking this extra step will help you build credibility with your lender in the event you need some flexibility down the road. Not to mention, it will go a long way in minimizing any potential conflicts that may arise.

Treat the loan with the same professionalism and respect that you would a bank loan

Don’t let the familiarity and comfort of your personal relationship comfort you too much! Keep in mind that your lender is doing you a favor, so treat the terms of the agreement with as much respect and vigilance as you would a traditional bank loan. At a minimum, this means paying on time and treating your deadlines as fixed, not variable or flexible. It also means following the guidelines you and the lender set out in your written agreement and keeping your lender updated on any significant changes to your financial situation.

Taking these simple steps will ensure that you can work efficiently toward financial security while still preserving your important personal relationships. If you have questions about the feasibility of a personal debt consolidation loan, feel free to contact us. Our experienced, committed team at Countrywide Debt Relief can help you evaluate your options and ultimately decide whether a consolidation loan is the best debt relief option for you.