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Should you pay off a debt with a personal loan or borrow from family and friends?

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Should you pay off a debt with a personal loan or borrow from family and friends?
15/07/2020

Should you pay off a debt with a personal loan or borrow from family and friends?

Borrowing money from your family or friends seems to be the quickest and simplest way to pay off a monetary obligation. Most often, your “lender” will not require interest or allow flexible payment arrangements. However, before picking up the phone and asking your parents, sibling, cousin, or best friend to lend you money, consider the non-financial risks that can put a strain on your wonderful relationship if you fail to pay it on the day you promised to. It is essential to treat your personal loan with the same respect that you would give to a bank loan to prevent irreparable damage to the relationship like loss of trust, resentment, and guilt.

Things to consider before asking for a loan from friends or family

1. Is a presentation necessary?

If you want to be clear and understood by your lender, a short case presentation is a good idea. It should state the purpose of your loan, how are you going to pay it, and how much interest you are willing to add. Having a personal relationship with the person does not excuse you from being professional and accountable. It will also prove how serious you are to your proposition and understand why you need funding.

2. Do I have to device repayment terms?

Offer a repayment scheme that is agreeable to both of you. Lack of clarity can cause trouble along the road, so formulate terms of payment and seek the person’s approval. By being business-like in your approach, it will save you from future awkward conversations. Put everything in writing to remind you of your promise. Pay the loan back up to the last dollar to show your commitment.

3. What if I miss my payment?

Things happen and can cause missed or late payment of the loan, so you must have a plan in your proposal to make up for the delay. You can offer a late payment fee that increases over time. Another option is to offer a collateral to show how committed you are to the loan agreement. A good repayment plan means nothing if you cannot keep to your promise, so make it one of your top priorities.

4. Do we need a signed contract?

If you are borrowing a large amount of money, it is best to have a written contract. It safeguards your family or friend’s interest, eliminating potential problems and conflicts in the future. It also makes you more accountable for your financial obligation.

5. What if they want the money back sooner than the stipulated period?

Sometimes, life can be tricky and will change its course. If this happens, you have no choice but to find a way to pay your loan, especially if you can see that it is urgently needed. You need to set aside the written agreement and pay your balance to help your friend or family get out of the mess. This is one big factor you need to consider carefully before asking a loan from people close to your heart.

6. Does it make you emotionally indebted to your lender?

This is perhaps the risky part of borrowing money from a friend or relative. You feel a sense of obligation to their requests while you have a standing loan. If he or she requests a non-monetary favor, you cannot say no. So, think twice before asking a loan from your inner circle to avoid emotional consequences. Other credit options that prevent you from seeking a loan from family and friends.

If asking for financial help from a family member or a friend makes you uneasy, it is best to consider alternative ways. Here are the most popular ones:

Personal loan

A personal loan is the most common way to finance a big payment. The interest rate of banks for personal loans is more reasonable. Another advantage is the realistic and sustainable payment scheme over a longer period. The monthly repayments are fixed and computed based on the capital and interest. Take note that if your credit score raises red flags, it will affect the interest rate on your loan. A good and stable credit history comes handy during this time. A good way to ensure on-time payment is to set up a direct debit account that automatically transfers the money.

Debt consolidation plan

DCP loan is a kind of repayment scheme that helps you manage your money obligations like credit card debts, personal loans from different banks, and other unsecured credit lines. The debt consolidation plan allows you to avail of a single loan that covers all the existing debts. It is a practical way to control the increasing individual interest rates. With DCP loan, you will be paying a much lower interest rate, which is between 3.98% and 6%. It gives you a good alternative to pay off your debts realistically. However, repayment terms will take much longer since you are paying off all your current debts.

Balance transfer

Like a DCP loan, the balance transfer is another option to pay your current debts with lower interests. It works by transferring the existing outstanding balance to a credit line or credit card account that offers a lower interest rate. The advantage of this method is that it allows you to manage your debt better. The best practice is to repay the entire amount within the zero percent interest window. But if it is not possible, you can pay the minimum repayment sum, which is 1-3% of the total amount you owed.

Take note that for every transfer, you will be charged a 1-5% processing fee, while enjoying 0% interest rate for 3, 6, or 12-months period. Another catch with this method is the late fee charges that are between S$60 to S$125 if you do not meet the minimum payment. Failure to pay the whole amount within the 0% interest window will also increase the interest rate between 18-26%.

Credit cards

They are the least ideal option to pay off debts in Singapore because they have the highest interest, which is between 19%-26% per annum. It is best to make credit cards your last option.

 

Conclusion

Borrowing is a personal commitment that requires a commitment to pay the obligation, whether you are getting it from your loved one, bank, and other credit institutions. It is important to weigh all the consequences before deciding to preserve a harmonious relationship with the family or friends and maintain a good credit score that will benefit you in future undertakings.

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