Tess Vigeland: Those of you who've tried to get your hands on a loan recently know it's not so easy these days. You need a stellar credit score and a pristine borrowing profile. If you don't have those -- and many people in this economy don't -- you've got a choice. Give up on the loan or turn to a funding source closer to home. But is it any better to a borrower or lender be when it's family?
Michigan Radio's Jennifer Guerra reports.
Jennifer Guerra: So what do you do if, say, you want to buy a new house, but you haven't sold your old house yet and you need that money for a down payment? Well, if you're Pete and Michelle Baker...
Pete Baker: Basically, we went to my parents and borrowed $40,000 from 'em for the downpayment on the second house, hoping that we would be able to pay them back immediately upon selling our first house.
Guerra: When you broached the topic, how'd you do it?
Pete: It was definitely a hesitant conversation at first.
Pete went for the easy target first: His mom, Brenda. Pete says it did not take much to convince her to give them a loan. His dad Frank, on the other hand, was a much harder sell.
Pete: I mean, he's the one that brought up interest, he's the one that brought up structuring payments, he's the one that brought up writing out contracts and putting everything on paper. But then he didn't insist on any of it. It was definitely a handshake-over-a-beer type thing.
One $40,000 check later...
Door knock and greetings
I caught up with Pete and his wife at their new house. By the time I got there, the bubbly was poured, the air conditioner was on full blast and Pete's parents -- Brenda and Frank -- were checking out the new digs. When I went to get Frank's take on loaning money to his son, he drops this bomb on me:
Frank Baker: It's always dangerous to loan money to relatives. Family's too valuable to risk on a disagreement on a loan.
You heard right. Mr. Frank "$40,000 handshake" Baker says family loans are a bad idea.
Frank: If you really need that money, then you better structure it so you get it. Otherwise, don't do it.
Guerra: But you didn't follow any of that advice.
Baker: Well, we don't need it to retire on. We don't need it for anything crucial in our lives. If I get paid back, that's great, but it's not worth losing a relationship over.
But what if your best friend or cousin asks you for a loan and you have the money, but unlike Frank you actually need to get it back? Well no surprise here, the Internet has a solution. Turns out there's a growing sector of peer-to-peer lending websites. For a fee, you can use the sites to set up a formal loan with your friend or a family member. Some of the sites even let you track repayments online. There are about 10 these social-lending websites. One of them, LendingKarma, even has a hokey video to lure you in.
LendingKarma ad: LendingKarma can help you ensure that your personal loan is a success...
Michael Kovacs founded LendingKarma three years ago. To date, 10,000 people have used the service, and he says it's just hit a half billion dollars in loans. Unlike a bank, these sites allow borrowers and lenders to set their own terms for the loan.
Michael Kovacs: The lender usually gets a better interest rate than they would if they kept their money in a savings account. And a borrow certainly gets a better rate usually than what they would from a bank.
The number one type of loan made on the site? Car loans.
Kovacs: You know, a used car loan at 14 percent -- someone in their family can lend them that same car loan at 8 percent and that's a great return.
Stephanie Landragan: I've lent money to my friends for cars, for helping them out when they couldn't make the rent.
That's Stephanie Landragan. She's an instructor with UCLA Extension. She used to loan money the old fashioned way -- with a handshake, or by scribbling a note on a kitchen napkin. Once, Landragan loaned a friend of hers $5,000 so the friend could make rent. Six months went by and no talk of repayment.
Landragan: Then the seventh month, she took a vacation to Europe, which I think was on my money. Which was really hurtful and also really kind of a wake-up call.
Landragan ditched the friend, but did not ditch her desire to help people. She still loans money to people she knows, but now she formalizes those loans online. She likes that her money is helping out people she knows, rather just sitting in a bank somewhere. When I asked Landragan if she thought more of her friends might hit her up for a loan after they heard this story, she just gave a little laugh.
Landragan: Well, I think that most of my friends know that I'd be more than happy to help them out.
"The Bank of Landragan" does have a nice ring to it.
I'm Jennifer Guerra for Marketplace Money.