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Should I take out loans to pay off credit card debt?

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Question: My husband and I have $8,700 on three credit cards. No matter what we do, we can’t cut into that amount by very much — the interest rates are just so high.

My husband talked about getting a second mortgage or borrowing against our retirement accounts and paying everything off at once, but then I showed him how you warned about that just this month.

So now he wants both of us to ask our elderly parents for personal loans!

I’m embarrassed to do that with my own parents, who never had any debt in their lives. They only have one credit card and use it only for things like plane tickets and rental cars to visit us. Can you tell me if this is silly like you told the other person a few weeks ago?

— Jennifer in Connecticut

Howard Dvorkin CPA answers…

While your question is similar to the one I answered on August 6, my answer will be completely different. Why? Because borrowing against your retirement, home, or life insurance have objective criteria to measure against. As a financial counselor, I can crunch some numbers, cite best practices, and advise you.

However, when we’re talking about borrowing money from family, the financial takes a back seat to the psychological. As I wrote in my book Credit Hell

Getting a loan from a family member or a friend is a good way to ruin a great relationship. As the saying goes, “A friend is a friend until he asks you for money.” Step back and think about how your relationship with one another might be affected if you are late with one of your payments or if you can’t afford to repay the loan at all.

Don’t get me wrong, I see the appeal of such loans for credit card debt. Not only do you pay back high-interest cards in one single move, you pay back your family at a low interest rate — or none at all.

Sadly, in more than two decades as a CPA, I’ve seen this go wrong much more often than it goes right. That said, you can take steps to preserve your family ties. Ironically, they involve behaving more like a bank.

  1. Write it down and sign it. If you were borrowing from a bank, you’d sign a contract laying out the terms: how much, when payments will be made, for how much, and what happens if you’re late. Do the same, so there are no misunderstandings later.
  2. Offer collateral. As I wrote in Credit Hell, “Let your relative put a lien on one of your assets. That way, the lender will become a secured creditor, which means if you default on the loan, your relative can take the asset. Also, if you end up in bankruptcy, your relative will be better positioned to get at least some of what he or she is owed.”

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This may seem too impersonal for such a personal loan — akin to a pre-nuptial agreement before a wedding. However, you say you’re already “embarrassed,” Jennifer, to ask both your families for the money to pay off your credit cards. That tells me you realize the risks, even if subconsciously.

I’ll end with this warning: If you and your husband haven’t changed your spending behavior that got you nearly $9,000 in debt, asking your family to pay it off could mean you simply run up new debt. Your family is only helping you address the symptom, and not the cause, of your debts.

Whatever you end up doing, I’d suggest you talk to a certified credit counselor first. Our Free Debt Analysis doesn’t obligate you to do anything. You’ll learn all your options, and if you still go ahead with a family loan, you might be more comfortable.

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