7 Reasons Why Lending Money To Family And Friends Is A Bad Idea

By Akshay Sharma April 23, 2018 Finance

Have you tried helping out a friend by lending him money? Or have you tried taking out a small loan from a close relative? Almost all of us have experienced one or both of these things.

When someone important to you is experiencing a cash shortfall and they feel like there’s no way out, it’s difficult to turn them down. That’s what family or friends are for, right? While the act of lending money may seem like a sign of true camaraderie, there are numerous horror stories that may arise when friends and/or family members borrow and lend each other money.

Loans provided to a loved one carry the risk of harming not only one’s finances but one’s wonderful relationship as well. So before borrowing from or lending to a person whom you have a close relationship with, think about the 7 reasons why these loans are a bad idea.

1. Loans given to family and friends are open-ended

When you lend money to a friend or relative, the loan becomes more of a favor than a business transaction. Normally, there is no agreement in writing. Both parties have no particular term for the repayment. No expectations. No interest charged either. The lender holds onto the borrower’s promise to “repay as soon as they get the money.”

2. Repayment of the loan is never a priority

Since you are “family” or “good friends”, the borrower assumes that the lender would understand if he/she cannot repay sooner. The borrower has no consequences to face, like late fees, higher interest rates, and negative impact on the credit score. Without a particular deadline or threat of penalties to worry about, loans become the borrower’s last priority.

The golden rule is to keep personal feelings out of it. Don’t hesitate to make the cash loan official. Let both parties sign a contract, indicating the amount borrowed and the term of the loan. In this way, it’ll be easier to ask for the borrower’s payment without making hurting his/her feelings. It may seem harsh, but it’s also reasonable to charge interest rates to motivate them into repaying the loan.

3. Asking for the money back is the hardest thing ever

Whether we avoid it or not, loans given to someone close to you (even with a contract) is always personal. Chances are, the lender is aware of the borrower’s difficult financial situation and doesn’t want to pressure him on the repayment. What’s worse? The lender may need the money and the borrower is nowhere to be found.

Firstly, don’t lend what you can’t afford to lose. If you’re struggling to get the money back, find the time to talk to the borrower in order to resolve the situation. Offer gentle reminders instead of direct questions.

4. Gatherings become nerve-racking

Family reunions during birthdays, weddings, Thanksgiving, Christmas, and even funerals are meant to be enjoyed. But instead of enjoying these fun events, the borrower tends to stay away from the lender or refuse to bring up topics about the loan, money, or any financial topic.

5. Borrower may ask for more

In every family or circle of friends, there’s always that one “go-to” person when it comes to loans. That person may probably be more financially stable and privileged than others. The person is also compassionate and easy to talk to.

Refrain from being that person. It’s not greed – it’s a way to prevent two things: being taken advantage of and tolerating one’s bad behavior. When it comes to helping people with their financial need, do it in such a way that would help them work through their issues rather than giving them an easy way out of their situation. Instead of getting money from your own pocket, you may recommend other options for quick cash loans and give them advice about money management.

6. Borrower becomes a servant to the lender

If you take out a loan from a friend and you still have no idea when you’ll be able to repay, you have the tendency to feel inferior to the person. You are likely to give in to his/her demands. You hope that by doing so, you’ll be absolved from the late payment.

7. Both the lender and the borrower lose more than just money

They lose their beautiful relationship.

Not being paid by anyone sucks and it makes you furious; Not being paid by someone close to your heart makes that anger personal. When the loan is not settled, the lender feels not just the loss of money but a personal disappointment too.

Before you offer a cash loan to a friend or family member, consider the risk of damaging your relationship. Feelings of betrayal, awkward gatherings, bad-mouthing, and personal attacks by both parties may result from one’s failure to repay.

Author Bio: Carmina Natividad is a resident writer for QuickCash, an Australian-based business, providing short-term cash loans for your borrowing needs. She is passionate about writing articles regarding personal finance and money hacks.