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It's sink or swim for borrowers
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Out of the red and into the black

Borrowing options that offer a lifeline

"Borrowing money from friends and family is very risky, but you can also make it worth their while. I had three conditions when I borrowed money from my father-in-law:

Bilker's 3 conditions for borrowing from family
1. I paid him better interest than he could get at the bank.
2. I could pay off the loan as quickly as I wanted.
3. Most importantly, if he wanted the balance at any time, I would write him a check and pay it back in full.

"Family and friends must be your top priority. Pay them back first, never late."

McAuliffe has seen too many cases where a family member has bailed out a debtor only to see them run the debt back up again. "Anything like that takes away from the individual responsibility," he says. "If it's easy, we might not learn our lesson."

Peer-to-peer lending
Banks and even credit card companies are tightening their lending standards, so it may be worthwhile to see if you can get better interest rates using peer-to-peer lending sites (also called person-to-person lending) such as Zopa, Prosper or Lending Club. These social networking sites act as middlemen, enabling lenders and borrowers to come together. Some use an online auction system like that of eBay; others offer products with fixed rates for those on both sides of the transaction.

Generally, the middleman gets information from the borrowers, such as debt-to-income ratios, employment histories and credit scores, so that lenders can get an idea of their creditworthiness and likelihood of default. The deals involve fees and varying loan terms. It's important to understand how the system works before getting involved.

Raiding retirement funds
This is almost always a bad idea, but if you're facing serious financial difficulties -- for example, bankruptcy -- it's nice to have options.

Borrowing from your 401(k) may be the least disruptive way to access money earmarked for retirement, but it will almost certainly impact the amount you will ultimately have at retirement.

It's true that you pay yourself back with interest, and you benefit from that interest. But the money that you've withdrawn is not compounding or working for you. In addition, many people stop making new contributions to their plans while repaying the loan.

-- Posted: March 17, 2008
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