Posted on: Saturday, February 2, 2008
Keeping loan within family may be better
By Marshall Loeb
MarketWatch
NEW YORK — Does the idea of hitting up family or friends for cash make you cringe? You may be forgetting that the people close to you might actually be happy to lend you money.
In their new book that will be available in March, "The Busy Family's Guide to Money," USA Today money experts Sandra Block, Kathy Chu and John Waggoner outline the benefits of borrowing from your parents, grandparents, siblings or friends:
Win-win. The most important financial perk is that with proper structuring, your lenders can benefit financially from the transaction as well, and with very little risk. For example, if you are looking at mortgages with interest rates hovering just below 7 percent while your parents are struggling to find a CD or other safe investment that pays more than 5 percent, you can satisfy everyone's needs by structuring a private loan in which you make monthly repayments at 6 percent. The big picture: All that interest money would stay in the family.
Low risk. Since your parents or other private lenders can count on your personal commitment to repay the loan sooner or later, even if the original repayment schedule needs to be adjusted, they would be taking on a very low risk when they loan you money. To reassure them of your best intentions, sign a formal, written agreement documenting the loan.
Benefits for you, too. Among them, a flexible repayment schedule may be the most palpable: Unlike banks, which require a preset monthly payment schedule, a private lender might agree that you'll make quarterly payments, or even delay payments for a period of time (perhaps while you stop working to care for a newborn).
If you still blanch at the thought of asking for a private loan, approaching it as a business proposition may be a wise strategy. Suggest setting up a time to talk, even if you see your parents (or brother or old roommate) regularly and the formality seems odd.
If you get a positive response, prepare a one-page list of things to discuss, including how much you want to borrow, the interest rate you're offering to pay, your proposed repayment schedule, the legal and financial protections you'll offer to the lender and how much you have available for the down payment for the item you are looking to finance.
