Yes, you read that title right. Even though accepting said loan will turn you into one of these.
Imagine the following scenario. You’ve spent a little beyond your means over the past few years, and now you owe $15,000 in credit card debt. Because you’re an ambitious debt repayer, you’re looking to pay off this credit card debt in just two years. Here’s a quick look at what you’re up against.
Looks like our fictional borrower is in for a couple of years of Kraft Dinner, hot dogs, and refreshing tap water. $750 a month isn’t an insignificant amount of money, and neither is three grand of interest.
But wait. One night while eating dinner at their parents’ place, our borrower starts to talk about their love of food that isn’t pasta. Upon a little prodding, the entire story comes out. Assuming our fictional borrower is a woman, there will undoubtedly be some tears, because for some reason that what they do.
After the tears, an offer emerges. Daddy would like to lend his offspring enough money to pay off the credit cards. He can see the debt is a giant burden on his kid, and can save them almost $3,000 in interest just by cutting a cheque. He’s got his chequebook literally out of his desk, all he has to do is write a few words and it’s done.
But wait! Our fictional borrower puts their foot down. There’s NO WAY THEY’RE ACCEPTING THAT DIRTY MONEY.
Oh baby. That story had everything. Where’s my Pulitzer?
One of the greatest roadblocks on the path to wealth is our pride. We decide, for whatever reason, that certain things are above us, that we hold ourselves to a higher standard than to accept that. Many investors won’t invest in shares of tobacco, alcohol, or firearm companies, because those things are bad. (Even though the same investors will happily invest in Walmart or McDonald’s, companies that help create other problems.) I can probably list the personal finance bloggers who would be willing to invest in payday loans on one hand, even though they’re happy to pimp H&R Block all over the Twitter, a company that offers refund anticipation loans at payday loan like rates.
Although we already established the payday loan industry isn’t quite as profitable as everyone believes, it still represents impressive gross margins, assuming they can figure out how to get people to pay them back.
And of course, one of the main things keeping us down is borrowing from unoptimized sources. Going back to our example above, the fictional borrower is looking at saving close to three grand by just taking the money that their parents were happy to give them. This is letting pride get in the way of financial well being, which is generally a pretty bad decision.
I’ve said it before, and I’ll say it again. Emotion has no place with your money. Getting out of debt isn’t a psychology problem, it’s a math problem. As long as you’re actually serious about paying off your debt, why should it matter if your parents help you save interest? Most people got at least a small hand as they went off to college. What’s the difference?
You think that borrowing money from your folks keeps you in a suspended state of adolescence? Hogwash. There’s an argument to be made that your parents giving you money isn’t ideal, but we’re not talking about that. We’re talking about loans, and as a borrower, it’s your duty to your money to seek out the lowest cost financing possible. It’s also your duty to pay back that loan with the same zeal as if you owed it to Visa or Mastercard.
There are other ground rules before I let you borrow from your parents. The money has to be used for something that will benefit your financial situation. No borrowing to buy an overpriced condo in Vancouver or Toronto, and no borrowing for food so you can just allocate resources to buying weed. Also, your parents can’t go into debt to let you borrow from them. Ideally, they’ll also charge you a token amount of interest too, to further cement the realization that there’s a business element to the loan.
But wait, you’re saying. Nelson doesn’t know the emotional stress that comes with borrowing money from your parents. God, it’s so degrading! I want to be a strong independent woman, who won’t lever my current advantages by borrowing at lower rates, even though I’ll lever my ability to look good in a low cut shirt into free drinks at the bar. THOSE ARE COMPLETELY DIFFERENT, DAMMIT.
Well, I hate to break it to you, but I’ve borrowed an assload of money from my parents. I invested that money in income producing assets, and used that income to pay back every single dime that I ever borrowed, plus interest. I’m not going to say how much, but suffice to say I’ve paid back a considerable chunk more than anyone’s student loans or credit cards. It’s easy, once you treat that loan just like a loan from anywhere else.
You might be tempted to take this newfound low interest loan and delay paying it off, using it as cheap money while you pour your money into more profitable endeavors. This is when things get a little tougher. If you have financially unsophisticated parents, it’s probably not best to try it. If you do try it, it’s best to explain beforehand what you’re looking to do. Explain the merits of this new investment, and why you think it’s better to pour your cash into that.
And for God’s sake, don’t take any exotic vacations. That’s pretty much a slap in the face to your lender.
As long as a borrower does it responsibly, there shouldn’t be any issue borrowing money from family. It’s also up to family to make sure they aren’t lending money for any old reason. As long as a borrower takes their loan seriously and actually repays it to the best of their ability, they owe it to themselves to seek out the lowest cost financing. We have no problem using our other advantages to our benefit, why not that?