Borrowing From Relatives And Getting Out Of Debt

By Pinyo, on March 12, 2009

In this Ask the M-Network article, David admitted that he’s in a lot of debt and asked if he should take up his dad’s offer to get him out of debt. Should he count on dad to bail him out, or should he get out of this financial mess on his own? Here’s the question from David:

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)

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.

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 certified financial expert as needed.

Do you have a question you would like to have us try to answer? Send it in to Ask The M-Network!

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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