When Grandpa Michael started his business several decades ago, he borrowed money from Uncle George. Business went well, but the relationship soured. In fact, the relationship ended after years of fighting over money and just how much Uncle George should earn. I learned from observing this experience that family and business don’t always mix. As a result, I’ve often asked myself, “Self, should family ever be involved in my finances?” My general reaction is to say no. However, there is a bigger picture to consider. In certain situations, my answer changes to, “Well, yes.”

In the last few years, the Internet has seen the rise of social lending. For those of you unfamiliar with social lending, it’s when you receive a loan from someone other than a bank. So every time you ask your roommate to lend you $20 so you can go to that concert, you just participated in social lending. Sites such as LendingClub.com and PertuityDirect.com have formalized the process and allow nearly anyone to participate. Another big hitter in this market is VirginMoney.com. Sir Richard started his empire through a loan from his aunt. He now wants to help other individuals secure a loan from family or friends in order to start a business, pay off some debt, go to school, or even pay for their home.

So why use social lending, especially if the money comes from family, instead of obtaining a traditional loan from a brick and mortar bank?

1. Maybe you don’t credit qualify. We have all made mistakes and that might reflect on your credit report. Social lending provides an opportunity that might not otherwise exist.
2. You may find a better rate. Certain social lending sites, such as LendingClub, set the interest rate on each loan based on the credit history of each loan applicant. However, VirginMoney allows you to negotiate the rate yourself if you know the person(s) funding the loan. So if a bank offers you 10% on a personal loan, Grandpa Michael might agree to 8% (he knows you’re good for it).
3. Family wealth, or money passed on through the generations in your family, is difficult to maintain when you pay so much of it to financial institutions. Most of us want to leave assets or money to our children (whether that be funds to be used specifically for college tuition or a first home purchase or just good old hard cash). Either way, we cannot pass on what we have given to banks. By borrowing from family, you keep it in the family and encourage the growth of family wealth.

But what about mixing family and finances? Sure, it sounds like a good idea to keep money in the family, but what if you risk repeating what happened with Uncle George? This part is tricky. How you answer that question for yourself depends a lot on your relationship with family members. Though, I do have a few simple suggestions. First, keep the term of the loan short (2-4 years) if you believe problems may arise. Grandpa Michael and Uncle George were business partners for 30 years. Second, if you use a social lending site, then your payments are set, scheduled, and can be automated. Meaning, Dad doesn’t have to wonder when the payment is coming. And last, do not borrow money without a legitimate reason. This may seem obvious but consider the current economic condition and how we arrived here. There is a difference between needing a new car because you have outgrown the old one and needing a 2010 Escalade. If you overextend yourself with family, they may or may not be more forgiving than a bank.

In short, borrowing from family via a formalized process helps you receive the financing you need and has the added benefit of growing family wealth. Though as with any loan, ask yourself this question first, “Do you really need the money and can you afford the payments without a high risk of overextending yourself?”

So have you or would you borrow a substantial sum of money from family? Leave your comments below.

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(This post was featured in the Carnival of Personal Finance – History of College Footbal Edition)

A few years ago, I was sitting at my desk at work when I received an email alert from Equifax. Concerned, I opened the email and found that a collections agency had just popped up on my credit report. My first thought was, “Who is trying to collect from me?” My second thought was, “There goes my credit score.” Since I hadn’t been contacted by the collections agency and I was unaware of any outstanding debts, I was left completely confused and wondering what to do.

An illegitimate collections account

After checking my report, I found the name and contact information for the agency. Since my first response to pretty much anything is to Google it, I immediately searched for NCO/Fin 99 (the name of the agency). The search yielded a lengthy list of complaints against the agency. Apparently, they had many reports of fraud and predatory business practices. Not wanting to be a victim of fraud, I spent time researching how to resolve the issue and remove the account from my credit report (which should be a high priority).

After following the advice that I received online, fighting the claim, and waiting several months, the collections agency decided not to pursue me and removed the account from my credit report. To this day, I have been unable to determine what debt it was that I allegedly had not paid.

Steps to resolving a collection account

I have outline below the steps that I followed to have the delinquent account removed from my credit report. If a collections account happens to surprise you one sunny afternoon, this same process should help guide you through remediation.

1. Obtain as much information about the company and debt as possible. For example, you will need at least the name and mailing address of the company, the amount of the debt, and the account number. Your credit report should contain all of this information. Other useful information is the original creditor (helps you determine if the account is legitimate).
2. Write a letter to the collections agency requesting verification of the debt and that they cease attempting to collect the debt until verification is provided. I have placed below an example letter that you can use. Just fill in the blanks, sign, and send it off via certified mail and return receipt (you want to have a record that you have contacted them).
3. At this point, the agency will either stop pursuing you and remove the account from your credit report or send you verification of the debt which should include additional information.
4. If you receive verification of the debt, then the next step is to negotiate settlement and the removal of the account from your credit report. You do not want the account to linger on your report and damage your credit score. Contact the agency via phone or certified mail telling them that you are willing to settle the debt if they remove the instance from your credit report (this request is known as “paying for deletion”). Once they agree, try to get the agreement in writing.
5. Next, pay the debt. I am not advocating or telling anyone to avoid paying debts that are rightfully yours. If you incurred the debt, then take responsibility and pay it. Having said that, try to negotiate with the collections agency to reduce or remove any late fees or interest penalties so you only owe the principal amount.
6. Monitor your credit report to see if the account is removed. If you find that the account has not been removed, then dispute it directly with the credit bureau letting them know that the situation was resolved and the collections agency had agreed to remove the account.

A legitimate collections account

Recently, I received another notification that I had a collections account on my credit report. Knowing the hassle I had had several years ago, I expected more of the same. After sending the validation or verification letter, I received notice that I did indeed have a past due debt. Three years earlier, my wife (fiancé at the time) had illegally parked my car and received a parking ticket. We were married a short time later and forgot about the ticket in all of the excitement. We now owed over $100 for a $30 ticket. My wife called the agency, explained the situation, and they reduced the amount to $60. They also agreed to remove the account from my credit report. We happily paid, the account was removed, and my credit report remains clean of any blemishes today.

For more information on how your credit score is calculated and how you can increase or maintain it, read “How I had an 800 FICO score at age 24“.

Example Validation or Verification Letter

[Date]

[Company Name]
[Street Address]
[City, State Zip Code]

Re: Account Number: [Account Number]
Amount of Claimed Debt: $[Amount]

Greetings:

I am writing to give you notice under the Fair Debt Collection Practices Act that I dispute the above-referenced debt and request that you verify it. I also request that you provide me with the name and address of the original creditor and copies of all documents which pertain to the above-referenced account and the alleged debt.

This letter shall also serve as a reminder that you must cease collection of the debt, or any disputed portion thereof, until you obtain verification of the debt and the name and address of the original creditor and mail that information to me.

Thank you for your prompt attention to this matter.

Sincerely,

[Your Name and Sign Above]