Personal Loan to Consolidate Debt

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There are many options available for one to consolidate debt. One of the best options is a debt consolidation loan. A consolidation loan can be a good way to lower debt payments and interest rates. However, most of the time in order to find a loan with lower interest finance charges than the consumer debt being consolidated the lending institution will require collateral. Usually collateral is provided by securing the loan with real estate equity.

An Unsecured Loan
But what if there is no collateral or the debtor does not want to burden their assets with any more liens? Well, what’s left is to apply for a personal loan to consolidate debt that is unsecured. Replacing credit card and consumer debt with a personal loan to achieve lower payments and interest cost can get tricky if credit scores and credit histories are not suited to an unsecured loan with favorable terms. Even if credit is perfect getting unsecured personal loans in today’s credit environment can be very challenging. Settling for a subprime personal loan to consolidate debt might be “jumping from the frying pan into the fire”.

An Unconventional Source of Loan Capital
What if there were a reasonably priced bad credit personal loans and no credit check personal loans source readily available? It could be closer than most people needing a personal loan realize: Their friends and family! That’s right. If friends and family have savings or investments earning minimal interest (which is what savings and money market funds and paying these days) they may be more than willing to lend to someone they know and trust in order to earn a much better return.
However, there are several matters to give very careful consideration to before borrowing from friends and family.

Is The Loan A Reasonable Risk?
The first order of business is to realistically determine the risk the lender is taking when lending money to a friend or family member. If the money is borrowed in desperation without a reasonable chance of the loan getting paid back severe conflict among family or friends is likely. This can cause hard feelings that may never be forgotten. Not only money but relationships with friends and family are at risk.

Additionally, the lender must be in a financial position to bear the risk and only lend money that is invested in low yielding financial assets where lending the money to a friend or family will yield a higher return for a somewhat higher risk. It does not make sense to earn a higher interest rate by taking a much higher risk not in line with the reward. Therefore, both sides of the transaction must keep emotions out of the risk assessment. It would be very unwise for the lender to let emotions blind them to the real risk of the loan by feeling they have to “help out”.

The ideal situation is for the borrower to be able to borrow money at a lower rate than can be found at their bank, credit union or other lending institution and the lender get paid a better return than they would receive by leaving their money invested with those same lending institutions and doing so without taking an undue amount of risk.

The only way this can happen is for full and complete disclosure and good faith on the part of the borrower. And for the lender to “underwrite” the loan as a safe investment based on the financial status of their friend or family member. The lender should not feel under pressure or obligation to lend the money even if the borrower’s financial situation will deteriorate without the loan.
If the lender determines the risk is more than they should prudently take on it is better is let a high-risk financial institution take on the risk because their risk is spread out over several loans. If one loan goes bad they can recover by earning back their loss with the interest earnings on other loans that do get paid back. Not so with the friend or family member.

If the risk factors are in line, many people are more than willing to take advantage of an opportunity to earn more interest income. In order for the lender to determine if the investment is worthwhile the borrower should consider allowing their friend or family member they are requesting the loan from to work out a budget and re-payment plan with them. Also, a legal and binding loan agreement should be executed. The terms of verbal loan agreements can be forgotten.

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