Everyone warns against borrowing money from family, but I found a way to do it that saved me hundreds and also benefited my parents

• I’ve never liked paying interest, so when I needed money to buy a car, I wanted to avoid it.
• Instead of taking out a bank loan, I borrowed money from my parents. I offered them 4% interest.
• It was more than their money was earning at the bank, and saved me about $300 in interest.
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I have a love-hate relationship with high-interest payments. I love when I receive them on my savings account, and I hate when I have to pay them on a loan. 

My husband and I have been lucky not to have to borrow money too many times in our over 20-year marriage. We borrowed twice for mortgages (not counting refinances) and once for a car. And we didn’t take out our car loan from the dealership or even a bank — we borrowed from my mom and stepdad.

We asked my family to loan us the money for a car — and they agreed

The first few years we were together, my husband and I shared a car. It wasn’t long before we needed to buy a vehicle for me to get to work and have the freedom to go to the grocery store or out with friends without planning around his need for the car. We were going to apply for a bank loan instead of a loan through the dealership because we were looking at cars offered by private parties.  

But then we started thinking about asking family for a loan. We are fortunate that we have relatives who can lend us money and that there is trust on both sides (I think we have all heard the advice not to mix friendship or family with business). When we asked my parents for a loan, our thinking was that we would pay them more interest on their money than they were currently making in a money market account, but we would pay less than the interest on a loan from the bank. 

We offered to pay them 4% on $6,000 over three years, and they agreed. The money they loaned us was earning less at the bank (although not too much less). If we had taken a bank loan, we would have paid approximately 7%. 

Our monthly payments to my parents were $177.14, compared to $185.26 if we’d borrowed from the bank. This arrangement was a more significant win for us than my parents. We ended up saving $292.27 over the course of the loan. Even though this doesn’t sound like much, it was significant to us at the time and we were able to avoid the need for credit checks and other fees associated with taking out a loan (so our overall savings was more).

We wouldn’t hesitate to ask for the same arrangement again

Our current car, a Honda Civic, is in pretty good shape, but accidents and theft can happen at any time. (In fact, our car got stolen from our garage in 2004.) If we found ourselves in the position of needing a new car again, before borrowing from the bank or dealership, we would approach our family once again. With interest rates at historic lows, we could easily offer to pay them 3% and avoid the over 5% average for people with the highest credit scores.

I’m a big believer in the fact that cliches and sayings become popular for a reason. So, if you decide to mix family/friendship with money, I suggest you put the terms in writing to avoid any misunderstandings or long-lasting damage. Our situation worked out well for everyone involved, but it is easy to imagine a less-pleasant scenario.

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