Should I Borrow from My Dad to Pay Down Some Debt?

Question

I’m 26 and am in a lot of debt, ~$24000 and recently my father offered me the opportunity to take out a line of credit he has to pay off my debts and I will assume the responsibility of that. This will allow me to lower my interest payments substantially per year and get out of debt faster. I am current in all of my accounts and have never been late on ANY payments on any card EVER.

But with the credit cards I have, many have upped the interest rates substantially in the past 3 months due to “economic times” and I feel as though I’m just treading water at this point and will never be able to pay them off. Understand, I am able to make all of my minimum+ payments, but these new interest rates have me trapped basically. This loan would allow me to be debt free.

Do you have any advice for what I should do beforehand? Should I look into negotiating down some of these debts with my creditors before he asks for the line of credit? What should I expect to happen? What would be the consequences? Is the credit rating hit for negotiating and closing worth reducing the debt to be debt free faster? (as it looks currently, it would take me about 2-2.5 years to pay off with the loan and reduced interest)

Thanks,

David

Answers

Here’s the response from Plonkee at Plonkee Money

For you, the consequences of doing this should only be good. For your dad, not so much. He’ll be responsible for your debt, and I don’t think you can legally take on responsibility for it. Which means that if you can’t pay for any reason, legitimate or not, it’s not your credit rating that you’ll be trashing, it’s your dad’s. If it’s a secure line of credit, then it will be risking whatever it’s secured on (like the house) and no lender is going to think that a good reason that your dad shouldn’t pay it off is because you were meant to.

Back on to the actual questions that you’ve asked. I think it takes 6-7 years for items to *fall off* your credit rating, so whether it’s worth taking a hit depends on what you plan on doing in the next 6-7 years. If you’ll want to buy a house (having saved up a large deposit) in that time, then you might have a problem, likewise if you’ll need to take out a car loan. You’ll be saving yourself some money, but it’s hard for me to say whether it would be worth it for you.

One thing that you can do which won’t have any negative effect is to call up the credit card companies and ask them for lower interest rates — can’t hurt, and might mean that you don’t need to tap your dad for a loan.

The whole idea is of course moot if you haven’t demonstrably committed to spending less than you make and not running up more debt — is it an attempt at a quick fix, or just a better solution?

Here’s the response from Glblguy at Gather Little By Little

First off you said “This loan would allow me to be debt free”. Not true at all, and the fact that you say that scares me a bit. You are not going to be debt free, you are just moving that $24,000 from your credit cards to your Dad’s credit line.

I think Plonkee’s point about the line of credit not really being yours at all is very very true, it’s your Dad’s and if for some reason you can’t pay, default, etc. — he is responsible.

While the lower interest rate is attractive, I don’t think using someone’s else credit to bail you out of a problem you created is the right thing to do. I would call your card companies and tell them you are struggling to make payments and need the rates lowered. I would also consider applying for Zero Percent Balance Transfer Credit Cards and moving your balances over to give you some relief.

Here are some other things you should do:

  1. Resolve to never get yourself in this kind of situation again. If you can’t control your use of cards, then cut up your credit cards.
  2. Find more income (40+ Alternative Income Ideas and Resources).
  3. Sell everything you can that you bought on credit and use that money to pay against your cards.
  4. Start a debt snowball. You can read more about that in my article on Get Out of Debt.
  5. Begin debt snowflaking

You’ve got a long road and it’s going to take some time and sacrifice, but you’ll get there.

Here’s the response from Patrick at Cash Money Life

I don’t know if you will be allowed to assume legal responsibility of your Dad’s line of credit, which means if he does this for you, then he assumes your risk. If you are both OK with that agreement, then this could work out well for you by lowering your interest payments.

If you are looking for another way to pay off your debt without putting your Dad’s credit score on the line, then you could consider peer to peer lending, which is a legal way to borrow money from others. Lending Club and Virgin Money might be two good options for your situation.

Whichever way you decide to go, there are two key actions you need to take: You will need to change your habits and not take on any more debt, and you will need to apply your extra cash flow toward your loans to pay them off more quickly.

Good luck!

Here’s my response

First, congratulation on recognizing the problem and trying to fix it. Yes, $24,000 is a lot of debt for a 26 years old; especially, if that’s not your student loans. As for the business with your dad bailing you out of your debt, that’s up to the two of you to decide. But like my friends said, make sure both of you understand what you are agreeing to and the consequences. It sounds like you are close to your dad and we don’t want money to hurt your relationship — which it can and often does.

Second, have you considered all the alternatives before asking your dad for help? You asked if you should ask credit card companies to lower your interest rates — the answer is absolutely YES. Asking for lower interest rates does not hurt your credit score, it saves you money.

In any case, I’d suggest looking at Dave Ramsey’s Baby Steps as a guide to help you get out of debt and put you back on track financially. My article walks you through each step and covers things like making the commitment to change your financial habits and negotiating interest rates on your debts. Your focus should be on the first few steps, which include:

  1. Making the commitment to change — i.e., no more debt, spending less, and making more money.
  2. Building a small $1,000 emergency fund.
  3. Using Debt Snowball to get out of debt.

Alternatively, you could also look into peer-to-peer lending. For example, you could borrow up to $25,000 from Lending Club, pay off all your credit card debts, and pay back your loan in 3 years.

I hope you found our answers helpful.

About the Author

By , on Mar 12, 2009
The following is a question submitted by our reader. You can see all questions submitted here, and submit your question here. Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a financial expert as needed.

Leave Your Comment (8 Comments)

  1. Jerry says:

    I think borrowing money from family and friends is not a big deal as long as you have a plan to pay it back. It will lead to resentment if you don’t have a plan. That’s the only insurance you have to keep the relationship intact.

  2. selena says:

    only do it if you are totally serious about ‘cutting up my credit-cards’.
    and understand that their is still a risk for you: if you fail to make payments you’re gonna have to live with the shame of dragging your dad down with you into financial problems.

    as for paying your father: the bank-accounts i have allow one to make pre-arranged transfers of a certain amount (say, $100) at certain intervals (every week, every month, etc), which is mostly used by people who want to set aside a certain amount on a savings-account.
    you should log in to your account and set it up to make monthly transfers directly after getting your salary. no risk of accidentally overspending and having to ask dad to please wait for your next salary-check.

  3. Bank Fiesta says:

    My paycheck goes into multiple bank accounts as direct deposits.In the ‘bill and desposits->paycheck” section,I think there is no diret way of setting up this .On the web,it was suggested to do some splitting in the “Deductions after Taxes”.I have some entries already in that section (like Medical,Dental insur etc.,).Money only asked only one bank info.

  4. tom says:

    From personal experience, if the guy lives at home and makes ok money, say around 1500-2000/month, he can pay off that whole amount in probably 12 months.

    I paid off 14K in about 7 months and my income was in that monthly range while living at home. And I cut back on practically as much as I could. I did not have any emergency funds or savings, it may be a good to have that but I really don’t know your situation. I had no car or any medical issues to worry about so i didn’t have an a emergency fund.

    this guys situation may be difference, but in the end, hes gotta suck it up and attack that debt aggressively.

  5. Adam says:

    I also think it’s a bad idea. There is a very important lesson to be learned here by the discomfort of his situation. If he were to be bailed out, that lesson would possibly be lost and the situation may occur again down the road. Call the credit card companies and get the rates lowered. It works…I’ve done it (recently). There are many articles available online that will walk you through the most effective way of getting the card companies to reduce the rates. Before you begin working on paying off your debt, make sure you STOP SPENDING MONEY. If you’re trying to pay off the cards and are still spending money on things that you don’t need to survive, you’ll just end up spinning your wheels.

    Use this as an opportunity to really feel the impact of consumer debt, and make sure you never let it happen again. It also makes for a good example to share with your children (if you have any in the future).

  6. David says:

    Hey guys, thanks for all your answers. I just wanted to clarify a few things that you had issues with and weren’t clear in my questions. Also, I live with my father, so he has no worries of me running out on the debt. Plus I’m not that kind of person (a statement I’m sure everyone would say in my situation) The main reason he’s doing this is so that I can pay off my debt at a reasonable interest rate and actually move out and move on.

    A) I understand that the loan is transferred to my father’s secured credit line. I meant debt-free in that all my credit cards will be cut up and I will be paying the loan to him monthly and will eventually be debt free in a much shorter period than I could ever do on my own. Definitely did not mean debt-free immediately, although I can see how you could get that from what I asked. I also meant assume that from him in that I will be paying it off, not legally responsible for it. (He understands this risk)

    B) While I have been irresponsible in creating the debt, I’ve also always paid on time and more than the minimums and do have a very secure position at a job that makes a decent amount of money. (Which is why he was willing to make this offer) The payment structure I’ve worked out with my father pretty much equals what I’m paying in interest alone monthly currently. And as I get raises and make more money, the payments will increase. I only accepted his offer because I’ve decided to change my life and spending habits so that I can move forward and save money and eventually buy a house. If I can get out of that debt in approx. 30 months (which is what is going to happen) it will allow me to move on with my life much sooner than if I was stuck paying high levels of interest.

    C) I have asked about lower interest rates and even cards that had issued them to me had turned around and raised rates as of the end of January. This necessitated opting out on the few I could pay off before the card expired, but on others there was no way I could pay them off in that time period without help.

    Thank you for all your help in answering me. This situation definitely was my own doing and I’m lucky I have someone who can help me get out of it. This is a shock to the system, there will be no more credit card spending and my life will be cash/debit card only and will eventually be much better off for it. Thank you all again.

  7. Dawn says:

    I think this is a terrible idea, and here’s why: back when I was young (and foolish) I used a loan to pay off my credit card debt. Suddenly I was no longer carrying a balance! It was wonderful! And you know what? Six months later all my credit cards had balances again – now I had balances PLUS a loan. Consolidating into one loan can be useful if you then go around cutting up all your cards and make a vow to not buy again until you pay it off, but in my opinion, the best thing to do is to use the other advice given (calling about rate reductions, snowflaking, snowball, etc.) to pay them down yourself. It is the only way you will ever stay debt free. You have to learn how to do it – the long hard way.

  8. HisHersMoney says:

    If you do go forward with having your Dad loan you the money you should look into whether your employer allows you to deposit your paycheck into multiple bank accounts. If they do you should set it up so that the amount you need to pay your Dad goes directly into his bank account. This way he will feel secure in knowing the money will be coming and you won’t need to remember to send it to him each month.
    If you are paid weekly just divide the total payment up by four and have that amount deposited into his account.

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