Why Lending Money To Friends And Family Isn’t A Good Idea

It’s normal for people who are in need of money to go and ask help from their friends or relatives to lend them some cash. But for the one who is lending the money, you may want to think it over before regretting your decision.

The co-CEO of oXYGen Financial, Ted Jenkin is a living testimony that nothing good will come out in those kinds of situations, based on his 25 years of being a financial adviser. Also, credit expert John Ulzheimer said that it is a very bad idea to lend money to your loved ones. He added that maybe they can’t get a loan from banks or other lending firms that’s why their only option is you.

Listed below are six reasons why one should not lend money to your friends or relatives and think of ways on how to politely refuse them.

1. You might not get paid back!

Habitually, we believe that a family member or a friend would not betray our trust that’s why we are confident to lend them money. But this kind of thinking should stop, because as long as you are not holding any formal promissory note, technically they have no obligation to pay you back, said Ulzheimer. In fact, according to a 2016 survey of iLoan, an online lender, there’s only around 50% of people who lent money to their relatives or friends are paid back in full.

Ulzheimer suggests that following an agreement and framework structure similar to financial institutions when lending would be a good idea to make sure that you’ll get back your money. First is to get a copy of their credit report, credit score, and their proof of income. The next step is to set a date on how long they’re going to complete the payment and if it’s on a monthly basis.

Otherwise, just give the money they need as a gift so that you won’t expect any payback from them. With this, it won’t hurt your feelings and damages your relationship with them.

Please note: you need to check the rules and any restrictions about gift and the amount you can actually lend as an individual.

2. It might create a financial strain – learn to say ‘No’

Borrowers might think that the loan they took won’t create any financial strain to their loved ones whom they borrowed from. However, many lenders experience the opposite, because in exchange for lending money to their loved ones is the risk of them compromising their monthly responsibilities like failing to pay their bills.

A US survey from iLoan shows that the average amount lent from family and friends over a lifetime is $8,546. In the UK, a recent report indicated the average unsecured loan is now over £13,000 but not it’s clear what the actual amount is for a personal loan made to another individual.

Neal Frankle (a certified financial planner and founder of credit repair website) like Ulzheimer, also believes that if you can’t make a gift of the money then don’t make the loan. He also said that you don’t have to put in jeopardy your own finances just to help someone else.

Better think carefully because you might end up in the same situation as your friend who borrowed from you. Just tell them that you’re not financially capable of helping even though you wanted to help.

3. It might hurt your credit – why risk it?

It’s human nature to help a loved one in need so even though you’re not financially capable of lending money, sometimes you would borrow money from lending firms just so you could lend it to your loved ones in need.

However, this is such a big risk to take and your financial situation will suffer if the borrower failed to pay it, Frankle said. Unfortunately, he encountered situations like this happen many times.

As a matter of fact, borrowing money has an impact on your credit score. According to myFICO.com, 30% of your credit score is based on the amount you owed on credit accounts. So it would really have a big impact on your credit score if you take another loan to help someone in need especially if you already have an existing loan.

And worst case scenario is when that somebody who loaned to you decides not to pay you back, you’ll have to shoulder all the loan payment on your own.

“You might have to kiss your good credit score goodbye,” said Frankle.

He added that having a low credit score means a much higher borrowing costs for you and you’ll be having trouble in getting future loans.

4. You’re enabling bad financial habits

When your relative or friend goes to you to lend money instead of going to lending firms, it’s possible that he/she cannot lend from them.

Frankle said that maybe they know something you don’t and whatever it is, is probably the reason why they can’t get a loan from traditional lending firms.

“It could very well be that the person who wants a loan could not get one because they are not financially stable enough to afford it,” he said.

Maybe in these situations, you advise him/her to be more responsible in handling his/her finances and find a much better way to earn the money rather than resorting immediately to a loan which he/she cannot take responsibility at the end of the day. Because if you just agree to them and give them what they want then you might unknowingly trigger their bad money habits and possibly worsen the situation rather than resolving it.

“Then, he might flounder, get deeper in debt at higher rates and have to take other drastic measures that he otherwise would not have to,” Frankle said.

Around 65% of people who have lent money from their friends or family have done so several times, according to iLoan survey. Surely, once you allow them to borrow money from you, always expect them to come again and borrow from you especially if they don’t know how to handle their money well. They’ll make you a living ATM machine for sure.

So better refuse them the first time they’ll ask a loan from you, to avoid situations like the above mentioned from happening.

5. It might damage a relationship – emotions running high!

One of the problems people encountered when lending money to friends or family members is how will you approach and ask them for payment especially when you feel that they’re avoiding you.

This will create conflict and tension between you and your loved ones because every time you see or just think of them, the first thing that will come up in your mind will be their debt to you.

iLoan survey shows that complications usually occur in cases such as grandchildren borrowing from their grandfather or when co-workers borrow from one another. Thus, you should consider not just the financial effect but also the emotional effect it will give to you.

6. Risking other relationship

Lending money to a friend or family member could create a conflict between other family members or friends. For example, if two of your friends needed to borrow money from you and unfortunately your budget can only extend to lend to one of them. It will surely make the other feel bad especially if you won’t properly explain it to him/her or worse if you keep it a secret – he or she could find out later on. This situation is also possible to happen on relatives.

In conclusion

Assess the situation properly before agreeing to a loan of a family member or a friend to avoid conflict and ruin your relationship with them and also avoid any financial problem ors tree from your side too.

Try to suggest ways on how they’re can handle their finances properly or introduce them to a personal loan lender such as a bank or better yet, check some peer-to-peer lending sites!

Lending to friends and family can of course work and this blog post just highlights the typical challenges we could all face. Having a business approach, the correct agreement, following the legal guidelines and making it clear to borrowers why you are doing this will ease any concerns and challenges later should it the worse case scenario becomes real.