Should you let friends borrow money?

 

10 Reasons Why You Should NOT Lend Money to Friends & Family

 Source:   http://www.moneycrashers.com/why-you-should-not-lend-money-to-friends-and-family/

Should you let friends borrow money?.

 

By Casey Slide

“Neither a borrower nor a lender be.” These famous words came from Polonius, Shakespeare’s chief counselor to King Claudius in Hamlet. As Polonius gives some fatherly advice to his son Laertes, Shakespeare gives some timeless advice to us: Do not lend money to friends.

Why shouldn’t we lend money to friends and family? Polonius answers that in his next line: “For loan oft loses both itself and friend.” Polonius knew that a loan to a friend or family member often results in the loss of both the money and the relationship.

In fact, loans between family members or friends can result in an entirely unexpected set of problems. Consider the following 10 reasons not to lend money to friends and family, and some tips to help you with damage control if you do agree to loan money.

Why You Shouldn’t Lend Money to Family & Friends

I have lent money to friends and family members and borrowed money from family members and friends, and neither situation worked out very well.

I learned a lot from both experiences. Most importantly, I learned that I’ll never loan money to friend or family member again, for the reasons outlined here. If you’ve already decided to loan money to someone close to you, here are some tips to help you mitigate some potential areas for communication breakdowns:

1. Open-ended Loans
Loans to family and friends tend to be open-ended. The parties don’t reach an agreement for a timeline for repayments, and don’t include interest on the loan. Lenders don’t know when their money will be returned, and borrowers don’t know when to repay the loans.

This leaves both parties in limbo, and doesn’t set any expectations. The uncertainty can lead to stress as the borrower may worry that the lender expects payment and the lender worries about when he or she will be repaid. When I loaned money to a family member, it delayed my decision to buy a house.

Pro Tip: If you must lend money to a family member or friend, provide them with a timeline and a schedule for repaying the loan. The timeline provides a final deadline for total repayment of the loan and the schedule provides them with guidelines for making monthly payments. For example, “John, I’m happy to lend this money to you, but I’ll need the money repaid by December 31st. If you can pay me $200 every month, the loan will be paid off by the end of December.”

2. Loans Are Not a Priority
With an open-ended loan, the borrower may not realize that there is a sense of urgency to repay the loan. Without a deadline, repaying the loan becomes the borrower’s last priority. The borrower won’t face any repercussions for not repaying the loan, like late payments, higher interest fees, or anegative impact on a credit score. Without the threat of penalties, the borrower has no motivation to take the loan seriously or to put any urgency around repaying it.

Pro Tip: Talk with your friend or family member and let him or her know that repaying this loan needs to become a priority. Set a deadline for repayment to avoid any misunderstandings.

3. It’s Difficult to Ask for the Money Back
It can be difficult to request repayment of a loan from a friend or family member. More than likely, the lender cares about the borrower, and doesn’t want the borrower to feel awkward. The lender may continue to worry about loan repayment, and thus shut down some or all communications with the borrower in order to avoid talking about the loan. The borrower becomes confused and hurt feelings can result.

Pro Tip: If you have already lent money to a friend or family member and struggle with asking for the money, take the time to talk to the borrower to resolve the situation. When I had a difficult time talking to my family member about paying back a loan, I offered gentle reminders about the loan instead of asking direct questions. This made the discussions easier and less threatening.

4. It Can Make Family Gatherings Awkward
I have loaned money to a family member, and I have also borrowed money from a family member. In both scenarios, family get-togethers were very awkward. I felt uncomfortable being around the person who loaned me money. It was also uncomfortable to be around other family members who knew about the loans.

No one wants to talk about the loan or about money or even about anything that costs money, because then people might wonder why someone hasn’t repaid the loan.

Pro Tip: You and the other party came to a private agreement about the loan. Neither party should feel uncomfortable, but if family gatherings seem awkward, keep things lighthearted and steer conversations away from money.

5. The Borrower Becomes a Servant to the Lender
The book of Proverbs in the Bible claims that the borrower becomes a servant to the lender (Proverbs 22:7.) This is exactly how I felt when I borrowed money. I felt that I had to please my lender and do everything that he suggested. I felt like I could not oppose this person in any way.

Pro Tip: As a lender, I didn’t think of my borrower as a servant to me, and I certainly didn’t want my borrower to feel that way. If you think the borrower feels subjugated, try to help ease his or her discomfort.

6. The Borrower May Ask for More
Once you have lent money to a friend or family member, this person may return when he or she needs more money. In addition, other friends and family members may also ask you for a loan.

Pro Tip: Don’t become the go-to lender in your circle of family and friends. You should never be in a state of constant lending.

7. You Enable Instead of Help Your Friend or Family Member
When you lend money to friends or family members, you give them an easy way out of their financial problems, instead of helping them work through their issues.

For example, your cousin may ask for some money to pay off her credit card bill, but she needs help learning how to make a budget. In that situation, refuse the loan, but offer to help your cousin create a budget or to look for alternative forms of income.

Pro Tip: Put your friends or family members in a position that improves their financial situation as well as their understanding of money management in order to truly help them.

8. These Types of Loans Don’t Earn Interest
Loaning money to friends and family costs you money. Most likely, you won’t charge interest if you give a loan to a loved one. I neither paid interest nor charged interest on my family loans. If you could invest the money that you lent to friends and family members, even through peer-to-peer lending networks like Lending Club and Prosper, you could have received interest.

Pro Tip: Charging your friends or family members interest on loans might seem awkward, but it isn’t unreasonable. Obviously, the interest rate would be much lower than the rates offered by local banks or credit card companies.

9. You Might Need the Money
You definitely want your money returned, but you may also need your money. What if you lose your job and you have no income? What if you spend your entire emergency fund while searching for a new job? What if you need to put food on the table for your kids and repayment of the loan marks the difference between you keeping your house or going into foreclosure? Not receiving repayment of the loan in a timely manner might spell disaster for you and your family.

Pro Tip: If you have any hint that you may lose your job, or that any sort of personal financial downswing is on the horizon, don’t lend money to family members or friends. Tell them honestly that you have a tenuous financial situation, and can’t spare the money.

10. You Could Lose Your Money and Relationship
As Shakespeare wrote, “For loan oft loses both itself and friend.” If you lend money to a friend or family member, beware that you may not get your money back and your relationship may never go back to normal. This will cause tension between you and the borrower, and may also cause guilt, remorse, and anger.

Pro Tip: The risk of damaging your relationship should be part of the initial discussion you have about borrowing or lending money. For example, “Kathy, I want to help, but I’ve heard horror stories about family members lending each other money. What can we do to ensure this doesn’t happen to us?”

Final Word

Even though you want to be a good person, and you want your friend or family member to love you, don’t lend him or her money if you can help it. Gently refuse the loan, and determine the best way to help your loved ones, instead of enabling them.

Sometimes loving someone involves doing something that they do not want, and they may be disappointed or mad. But if you have their best interests in mind, you can rest easier knowing you won’t jeopardize your relationship. If you can afford to loan money to a family member or friend, have an open and honest conversation to discuss any potential problems with the loan. Most of the time, issues related to these types of personal loans can be quickly resolved with a frank discussion.

Have you lent money to friends or family members? What was the experience like? Would you do it again?

(photo credit: Shutterstock)