Getting a bank loan or loan from parents.

Negotiator

I am looking to obtain a £7000 loan, one of the lenders has accepted my application the rate is 6%. My parents know that I require £7000 and have also offered to loan me the same amount at the same rate. The reason why they are doing this is because they'd likely make more money from loaning the money to me than leaving it in the bank. Even though its my parents, all payments will be on time and via standing order.

So what are the pros and cons of each. Of course if I get the loan of my parents, there is no record and will unlikely make my credit rating look even better when it does get paid off.

National_Debtline

Hi Negotiator

A couple of thoughts, and by no means exhaustive:

- It will make no impact on your credit rating whatsoever (unless you defaulted and your parents sued you, but let's assume that is an unlikely scenario!) Whether this is a pro or a con is a matter of interpretation, and may require a crystal ball. If you get into difficulty and have to renegotiate, I would assume that your parents would be easier to negotiate with and less likely to add penalty charges than a bank? If, on the other hand, you are able to go all the way through the repayment term OK, you may then end up regretting that that payment info is not available to other institutions you may approach i.e. mortgage lenders.

- Your parents would be liable for tax on the interest they earned.

Nice_Weather_For_Ducks

Pros of getting the loan from your bank:

You are taking responsibility for your financial life and decisions.
Wont cause a family rift/breakup if you default.
You cant say "Ill give you double next month" and get into bad habits.
Improve your credit score with ontime repayments.

Pro of getting the loan from your parents:

You will be helping them increase the return on their £6000.
You wont be giving extra profit to a bank.
In case of financial difficulty your parents may be more forgiving and understanding than the bank will be.
You wont trash your credit rating if you default.

If it were me taking the loan (I wouldnt as I tend to save up for everything I buy), I would only take it out from my parents if:
1) I know that in the worst case scenario it wouldn't hurt them financially
and 2) I was virtually certain that I would repay it as agreed (ie not overcommit myself, and have income and health insurance, and a long term steady job/income)