Friends and family loans: win/win

Friends and family loans: win/win

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One of the most effective ways to improve your credit worthiness and raise your credit scores is to lower your debt. That’s easier than said for many people, however.

Where are you going to get thousands of dollars to pay off a credit card?

Friends and Family Lending Trick

If you’re a low-risk borrower, you might ask a family member to lend you money in a win/win situation for both of you. If you have a credit card with 20% or higher APR, you might borrow money from a family member and offer to pay them 10% interest and pay them back in one year.

If that’s more than they make in the market and you are a better risk than the market, you both win.

For example, you borrow $5,000 from your parents and pay off a credit card with a 20% APR. You save $1,000 in interest the first year.

You pay your parents back $417 a month and pay off the loan in 12 months.

After your final payment, you wait until next month and send your parents $500. They make 10% on their loan to you and you save $500 in interest payments.

Depending on your relationship with your parents or a sibling, you might start out with a $1,200 loan and pay them back $100 a month. After they get their 13th interest payment, they see you’re good for the money and might lend you more.

If you’re more interested in raising your credit score than saving money on interest payments, offer your parents or sibling more of the interest money you’re saving.

FYI, your parents or sibling will probably have to declare your interest payment on their income taxes and pay taxes on that money. This will decrease their benefit from the deal. This is why it’s a good idea to try this with family members who are primarily looking help you out, rather than to make extra income.

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