Financial Literacy - Smart Borrowing
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personal loan
Borrowing from friends, family: risky

"You have a promissory note and you have an amortization schedule. If they didn't pay, you sent them letters demanding payment. If you don't hire an attorney and take some serious action when someone fails to pay you -- you would need to justify why you didn't," she says.

Possible explanations for not hiring an attorney include a pending bankruptcy for the borrower and uncollected IRS debts.

Third-party borrowing

A loan between friends may call for more than a handshake and a vague schedule of repayment -- especially when the IRS gets involved. Thanks to modern technology, an Internet-based business model called peer-to-peer lending has sprung up in recent years that allows borrowers to manage private loans in new ways.

Such companies as Virgin Money, Prosper and Zopa facilitate borrowing between family and friends as an alternative to going to the bank.

Virgin Money, unlike the other peer-to-peer lending sites, doesn't offer borrowers a way to connect with potential lenders. Instead it serves as a neutral third party to manage private loans. Through it, borrowers or lenders who already have established relationships can set up a private loan for real estate transactions, education or personal reasons.

"What we do is document the loan, but we also manage it with a repayment plan that is very flexible and can be modified. And it does things that a bank can't do by accommodating restructuring of the loan if it's needed," says Virgin Money's Asheesh Advani.

The firm acts as the payment processing company, debiting the account of the borrower and crediting the lender with a check or a deposit into his or her bank account.

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Payments can be made through the company and, if so desired, Virgin Money will report the loan to two credit bureaus: Experian and TransUnion.

"We make signing up for credit reporting optional," says Advani. "For some of our loans people have opted to have them build credit. And obviously missing a payment will impact your credit, so people tend to take them more seriously."

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