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Defaulting on inter-family loans

posted by Melissa Jacoby

Major news media outlets have been reporting on a business that manages inter-family or inter-friend loans, focusing on a company called Circle Lending (thanks to Salil Mehra for the tip).  Medical debts are among the business'  list of popular reasons for personal loans between family members, so the service was of immediate interest to me.  But beyond this, I would focus readers' attention on the stated protect-the-personal-relationship justifications for an formalizing intermediary and how these justifications relate to broader discussions of our debt collection system that sometimes is thought to be inefficient.  If an inter-family secured loan is set up properly, and the borrower defaults, the lender may exercise formal remedies (and in an NPR story linked on the website, the founder makes clear that this is contemplated).  Of course, foreclosing on one's grandson could indeed have relationship implications, so the relationship-protecting idea presumably stems from the belief that a borrower is less likely to default on an inter-family loan given the use of extra formalities that expand collection and enforcement entitlements even if rarely used.  Presumably, the risk of default is also lessened to the extent that these loans are granted with lower interest rates than those available from those in the business of extending credit to individuals?

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