Personal Finance

Should You Borrow Money From Your Parents?

Comments 0 Comments

During a 2012 campaign stop, Republican presidential candidate Mitt Romney famously told students to chase success by taking risks, getting necessary education and borrowing money from their parents, if need be.

Critics skewered the wealthy Romney for being out of touch, because most people’s parents probably don’t have the kind of money to dole out to their adult children on demand.

But hey, if it’s an option, why not hit up the Bank of Mom & Dad for a loan? There are plenty of advantages of borrowing from your parents, rather than a financial institution, but there are some big drawbacks, too.

PRO: Your Parents Are People
They’re compassionate. Heck, they love you, so if you can’t make a payment or may be a few days late, they’re more likely than a bank to accommodate your needs.

CON: Your Parents Are People
We may have grown up thinking our parents rule the world, but they’re just as likely to fall on hard times as the next person. Perhaps your parents have the money to spare at the moment of the loan, but if they encounter an emergency, you may feel pressure (real or perceived) to repay the loan faster. A low-cost loan may not be worth its uncertain future.

PRO: Cost
A loan from your parents is going to be cheaper than getting one from a bank or credit union. Well, your parents certainly could charge you a higher interest rate than the institutions would, but then why would you take a loan from them? Interest is expensive, so if you’re looking at an interest-free loan from Mom or Dad, you may have hit the jackpot.

CON: Doing Business With the People That Clothed & Fed You
Even when you’re dealing with Mom or Dad, get everything in writing. This is more a clarity issue than anything else, because five years down the road, who’s going to remember the exact terms upon which your parents lent you money? You should also be comfortable negotiating with your parents. Just because they raised you doesn’t mean you shouldn’t look for the best deal. If you’d rather not discuss the parameters of a loan at the dinner table, you’ll either need to get over it or find another lender.

Will It Affect Your Relationship?

PRO: Parents Are Forgiving
Will your parents come after you for every last penny of money they lent you? Maybe. But they may not. A bank, on the other hand, will most certainly hound you until your debt is repaid, with interest. At the same time, you shouldn’t go into a parent-child loan with the intention of repaying less than you owe. That’s mean — and failure to hold up your end of the loan agreement can strain family relationships.

CON: Relationships Are Messy
Don’t turn your mom or dad into a debt collector. (Remember how much you disliked it when they nagged you to do chores, finish your homework or go to bed? This will be even less enjoyable.) By borrowing money from your parents, you run the risk of hurting your relationship if you shortchange them. Another possibility: Because they provided the loan, your parents may feel like they have a say in how you spend your money. The bank-customer relationship is much more likely to be free of the emotional tangles that can result from family loans.

Then there’s the undeniable truth that we love to hate our lenders, even when they’ve done nothing wrong. There’s no shame in loathing your student loan payments and begrudgingly paying the servicer each month. That servicer represents your debt, an extra $400 you’d rather spend on fun things each month. No one’s saying you have to like your loan servicer. But when the lender is your mom? First, you love your mom. Second, your mom lent you money, so you should be pretty grateful. As cathartic as it may be to complain about making loan payments, remember you’re paying the woman who raised you.

PRO: Your Parents Don’t Report to the Credit Bureaus
You should never take on a loan you can’t afford, but if you find yourself struggling to repay your parents, you may not be in as much trouble as you could be. Borrowers who miss or make late payments to lenders who report to credit bureaus will see their credit scores drop, but working with your parents means you don’t have to worry about how the loan affects your credit.

CON: Your Parents Don’t Report to the Credit Bureaus
Unfortunately, ditching the credit pains that come with loans also means you forfeit the positive impact loans can have on your credit history. You’re not going to build credit by making on-time payments to your parents, nor are you going to reap the benefits of whatever else that loan will give you, like debt diversity or credit age.

There are a lot of things that go into your credit scores, and before you make any decisions about applying for new credit, you should see how it may impact your scores. You can quickly get a comprehensive picture of your credit using the free Credit Report Card, which gives you two credit scores and an assessment of the factors that determine them.

More on Credit Reports and Credit Scores:

Image: iStock

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Find out where you stand.
Get your FREE personalized credit report card.

Sign Up Now
X

Stay Connected to your experts

Please submit your email address to get credit & money tips & advice
from our team of 30+ experts, delivered weekly to your inbox.