How can I take out a loan to repay my parents for school debt?

Question

Background

• I am in the US.
• I got into a great school for undergrad that was expensive. My parents hadn't prepared for this and borrowed against their home equity to help pay for it.
• The amount of this debt is approaching $80k.
• I pay them monthly, but that burden is still sitting on their home equity.
• I am now in a position, thankfully, to now shoulder the entirety of that burden myself. I have a great job, more than enough income and a fantastic credit score. Taking the $80k of debt onto myself seems like the right thing to do.
• Furthermore, my parents would like to open up that space so that they can do something similar for my brother (it's not the best situation, but it's what they've got going on.)

Goal

I'd like to take the debt onto myself. To my knowledge, the only/best way to do that is to open a line of credit in my name and essentially use that line of credit to pay them.

Problem

Most banks only see this as a personal loan, and are not normally inclined to make an 80k personal loan, especially with no prior loan history for them and only small school loans (they are unable to take into account that I'm paying $800+/month because a large portion of this is in checks to my parents.)

Questions

• What are some good paths to achieve this goal?
• Is a personal loan the only way to go about accomplishing this?
• Are there any companies or banks that are particularly good in these situations?

Answer 1

1. What are some good paths to achieve this goal?
2. Is a personal loan the only way to go about accomplishing this?
3. Are there any companies or banks that are particularly good in these situations?

Your #2 answers your #1 - since you don't have any equity in property you can only have a "personal loan", which is an unsecured line of credit. Had you had some equity (say a house, an investment portfolio, or even a 401k balance) you would be able to borrow against those. But you don't, so you can't.

Unsecured personal loans for people whose personal wealth is less than the amount borrowed is obviously a huge risk for the bank. What would prevent you from taking out the loan and declaring bankruptcy the next month? If you do - they're screwed. So the interest rates are significantly higher, the amounts allowed to take are significantly lower.

I suggest keeping the HELOC your parents have, and you yourself pay it off ASAP. It will be much cheaper, even if you get a loan on your own.

Answer 2

There's no getting around the fact that an unsecured loan is going to be much more expensive than one backed by equity. Interest rate payments could be 3 times as high or more. Can you afford that? Even if you could, "seems like the right thing to do" is not a good reason to pay more interest than necessary.

In order to minimize costs, you (as a family) should borrow as much against the home as possible and only take a personal loan once that possibility is exhausted.

Of course it's also a good idea to consider the scenario that is the reason for the higher costs of an unsecured loan: you could lose that great job and be unable to replay the loan. When that happens and it's a home equity loan, your parents lose the house. If it's a personal loan, you have to go through bankruptcy.