It can be hard to refuse to loan money to lớn a close friend or family member. You may even feel obligated to lớn lend a financial hand khổng lồ your loved ones simply because they’re important khổng lồ you & you don’t want to see them struggle.
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But lending money to loved ones comes with considerable risk — not just in terms of getting your money back, but also when it comes to the relationship you have with the person in question.
Enabling poor spending habits and causing awkward conversations are just two of the many reasons providing loans to loved ones is a bad idea.
Why You Shouldn’t Offer Loans to Friends or Family Members
Lending money to family and friends often comes with more problems than it solves, both for you and the person you loan money to. The consequences of a bad loan to lớn a loved one range from difficult lớn dire. For these reasons, sometimes, it’s best khổng lồ say no.
1. They’re Open-Ended
Unless you agree to a structured repayment plan, most personal loans between friends & family members are open-ended. That means neither các buổi tiệc nhỏ knows when payments are due, how much they should be, and whether the borrower must pay any interest.
Open-ended loans don’t outline the expectations or obligations of either the borrower or the lender, leaving you both khổng lồ make your own assumptions about the loan & how lớn handle it in the future.
If you choose khổng lồ lend money lớn a loved one, outline your expectations before handing over any cash. Communicate about repayment terms like due dates, amounts, and whether you will charge interest. Even better, create và sign a loan agreement khổng lồ document the terms of the loan in writing.
2. Repayment Isn’t Always a Priority
Friends và family members know you love them, so repayment isn’t typically a priority. The money isn’t coming from a financial institution, & there aren’t any immediate consequences for late payments, such as late fees, high interest charges, or a negative credit score. Sometimes, borrowers feel less obligated khổng lồ repay the loan promptly. They may prioritize an unnecessary purchase over paying you back, assuming you’ll understand.
If you can’t rely on the borrower to lớn make payments, it becomes your responsibility to lớn follow up và ask for the money back, which can be difficult without straining your relationship. Emotions can take over & cloud your judgment, making you more likely khổng lồ accept excuses và half-promises.
You don’t want your loved one to feel angry, guilty, or ashamed, which can make bringing up repayment difficult, especially if it becomes an emotionally charged conversation that leaves you both upset & unsatisfied.
If you’ve already loaned money lớn someone you care about và aren’t sure how to ask for repayment, approach the topic carefully.
Avoid broaching the subject at gatherings with other friends or family members who aren’t involved, which can only make things uncomfortable for everyone in attendance. Instead, choose a neutral setting and have a one-on-one conversation. Be polite and straightforward, keeping your emotions in check.
Then make a plan together. Although they may not be able lớn pay the entire amount in full, you can at least agree to a structured repayment plan that works for both parties.
3. It Could Damage Your Relationship
There are so many ways a loan can go wrong. And unfortunately, they can affect how your relationship plays out long term. If your interactions sour because of issues related lớn a loan, it may be hard lớn repair any damage.
And if the borrower is ultimately unable to repay you, money often becomes part of every interaction you have, taking away from the relationship you’ve built and causing hard feelings.
The tension between you and the borrower may lead lớn anger, guilt, shame, and remorse. All of that can permanently damage your relationship, whether or not they eventually pay off the loan.
If you’ve already lent money to lớn a loved one, discuss potential issues before things go south. For example, talk about:
The loan termsWhat you will bởi vì to avoid potential relationship issues
What each of your expectations and obligations are
How you will handle any problems that arise
The risks associated with lending money lớn loved ones
4. It Can Make It Awkward for Family and Friends
If you và the borrower get to lớn a point that the loan affects your relationship, it will be noticeably awkward for everyone around you. Disagreements can lead khổng lồ drama, & your mutual acquaintances may feel obligated to lớn choose sides.
It could also mean you speak và interact with each other less or avoid attending the same events altogether. That can affect your friends or family members, who may feel they have khổng lồ make special arrangements for events lớn work around your feud.
If you’ve already reached the point that a loan you made khổng lồ a loved one is affecting your relationship, go out of your way to keep one or both of you from being disinvited to lớn group events. Steer all conversations away from money & choose the right time & place khổng lồ discuss your personal issues.
5. The Borrower May Feel Obligated khổng lồ the Lender
When people borrow money from a ngân hàng or financial institution, they feel obligated to lớn repay the loan, but it’s purely financial. When they borrow money from a loved one, they often feel a moral & emotional obligation to that person because the lender helped them out of a tight spot.
Sometimes, people unintentionally (or even intentionally) manipulate friends or family members they loan money lớn when the borrower can’t pay them back.
For example, they may attempt to lớn control a borrower’s spending or expect them khổng lồ take on extra tasks và responsibilities until they’ve repaid the debt. In these situations, it’s hard for a borrower lớn refuse, putting them in a difficult position.
If you lend money lớn a friend or family member, be conscious of the moral obligation they feel lớn you, & don’t take advantage of their situation. Although they may owe you money, you don’t have a right khổng lồ expect them to vì chưng whatever you ask.
6. The Borrower May Ask for More
If you agree to lend money khổng lồ a loved one once, you can bởi vì it again. At least, that’s how a borrower may feel.
An initial loan to lớn help with a debt or purchase may not seem lượt thích a big deal. But just as a lender can take advantage of a borrower, a borrower can take advantage of a lender.
If a borrower knows you have money you’re willing lớn share, there’s a chance they may attempt to lớn use you as a personal ngân hàng account. You become a safety net khổng lồ fall back on when they run into issues with their finances. Và it means their debt khổng lồ you is constantly increasing, just as your savings tài khoản is decreasing.
If a borrower requests an additional loan, it’s best to refuse (politely). Offer lớn help them in other ways, lượt thích developing a personal budget or coming up with alternative options for whatever they wanted lớn use the loan toward. For example, suggest a public transit pass in lieu of a new vehicle.
7. It Enables the Borrower’s Bad Financial Habits
If a borrower knows they can run lớn you for financial support every time they run into budgeting dilemmas, it gives them an easy way out of dealing with their financial issues.
Instead of learning to manage their own money problems, like repaying student loans or managing credit thẻ debt, they rely on borrowed money from you to lớn tide them over.
That isn’t conducive khổng lồ understanding financial responsibility & effective money management. Instead, it sets them up for even more potential pitfalls in the future.
When a loved one asks you for a loan khổng lồ pay off a debt or make a purchase, try to determine the real issue.
For example, could mapping out a monthly budget enable them to pay their own bills? If so, instead of handing over cash, help them plan their monthly spending và teach them how lớn become more financially independent.
That helps them long term as opposed lớn giving them money, which will likely over up as a Band-Aid solution to poor spending habits or lack of budgeting.
8. They Don’t Earn Interest
Unlike bank-issued personal loans, personal loans between friends don’t usually accrue interest charges over time. That means they have less motivation khổng lồ pay you back.
If you’d put the amount you loaned khổng lồ your friend or family member in a high-yield savings account, you would have earned interest from the bank. & while the amount may have been meager, it still would have been something.
If you lend money to a loved one, include an interest rate in your agreement. It will motivate the borrower lớn pay & get you a small return on your loan.
9. You Might Need the Money
Without a repayment plan or due date for the loan khổng lồ be paid in full, it’s hard khổng lồ say if or when you’ll get it back. But what if you need lớn choose between making a mortgage payment or buying groceries?
Unexpected financial issues, lượt thích job loss or a major car repair, arise when you least expect them.
If you’ve loaned your entire emergency fund khổng lồ someone else, you won’t have money to lớn fall back on when times get tough in your own household.
It’s imperative you consider your own financial situation if you have a tight budget or limited savings since that could leave you in an even more vulnerable position if unforeseen circumstances arise.
10. It’s High-Risk
If a ngân hàng refused your loved one a loan, it means the financial institution they approached deemed them too high-risk khổng lồ lend money to.
That could be because they have a high debt-to-income ratio, a poor credit score, no collateral, or limited assets. And if the borrower is unlikely to pay back a loan from a bank, what makes you think they can repay you?
When lending money khổng lồ a family thành viên or friend, it’s vital you understand you may never get it back. With little to no accountability in the form of late fees or the threat of a lower credit score, motivation to lớn repay the debt is often low.
You don’t have the same resources or collection tactics a ngân hàng does. There are ways lớn get repaid when a loved one owes you money, but some of them are likely to over the friendship.
If you’ve loaned money to a loved one & there’s no longer any hope for repayment, you need khổng lồ decide how to lớn move forward. If you choose not lớn pursue it, bởi vì your best khổng lồ move on & repair any relationship damage.
If you want or need your money back, you can attempt khổng lồ collect on the debt in small-claims court if it qualifies, but there’s no guarantee a judge will side with you, especially if you don’t have a written agreement or evidence of collection attempts.
11. It Could Damage Your Credit
If you’re unable khổng lồ provide a loved one with a loan, they may ask you to be a co-signer on a ngân hàng loan. At first, it can seem like a win-win. You don’t have khổng lồ part with your money, & your friend or family member gets the cash they need.
But it isn’t as simple as that. Co-signing a loan means you’re just as responsible for the debt as the other party. If they miss a payment, the bank expects you to lớn pay the amount due instead.
And the longer a payment is in arrears, the more likely it is khổng lồ affect your credit rating negatively.
Unfortunately, if you’ve already co-signed for a loan, you’re legally bound lớn the debt. The only ways you can completely remove yourself as a co-signer is if the borrower refinances the loan or the loan has a co-signer release clause that allows the borrower khổng lồ remove you after a certain number of on-time payments.
12. It’s Based on Emotion, Not Logic
Lending money to someone you care about isn’t based on logic. Your emotional ties lớn that person và whether you feel obligated lớn help or tư vấn them heavily influence the decision.
Unfortunately, that means you’re more likely to brush aside red flags like consistently poor spending habits & financial irresponsibility. Và you’re more likely to agree even when it goes against your better judgment.
For example, if a sibling asked you for a loan, would you give it to lớn them because you know they’ll pay you back or because you feel lượt thích you have to?
Final Word
Providing cash to lớn someone you care about feels lượt thích an act of love, but it can quickly sour your relationship. Lack of repayment, emotional manipulation, & depleted funds are risks you take when you lend to a friend or family thành viên in need.
To avoid the financial, social, & emotional tolls associated with lending money khổng lồ a loved one, it’s best to keep your cash to yourself unless you’re offering it as a gift. Steer clear of awkward interactions and animosity by keeping your friends and family members separate from your finances.
You might think helping your broke friend is the right thing lớn do, but doing so could totally ruin your relationship. If you need some convincing, here are six reasons why lending money khổng lồ friends or family is a bad idea.
1) You’re a last resort
They’re likely coming to lớn you because they can’t get a loan from a bank. That means traditional lenders consider them to be too high risk lớn lend money lớn -- và that’s even after considering all the potential interest they could make on the loan.
Most loans to lớn friends & family have a very low or nonexistent interest rate. So by loaning a loved one money, you’re taking on a ton of risk for a fraction of the payout a ngân hàng would normally get.
2) You’ll probably never get paid back
Nearly three quarters of people who borrow money from friends or family never pay the loan back in full.
Rather than expecting khổng lồ get paid back, you should view the loan as a gift in your mind. Chances are you’ll never see that money again, so only lend as much as you are comfortable parting with.
3) You could be enabling your loved one
The majority of loans consist of parents lending money to lớn their adult children. Sometimes the reason for the loan is a good one, lượt thích a one-time emergency that was completely unexpected.
But often times the reason isn’t sound và helicopter parents are simply rewarding bad financial habits. If your kids think you will bail them out of any bad financial situation they get themselves into, then they’ll never be incentivized lớn develop good money habits.
4) You might actually need the money
Unexpected emergencies & job losses happen. & when they do, you’ll need extra money to pay your bills and stay afloat. If you have an extremely well stocked emergency fund, then maybe you won’t miss the money that you lent out.
But only a quarter of Americans have more than $10,000 in their savings account. So if you’re lượt thích most people, you’ll want your money back as soon as possible. Draining your savings khổng lồ help out a friend could leave you in the same position as them in the near future.
5) Having to repeatedly ask for overdue payments will get awkward
Since most loans are never repaid, there’s probably going khổng lồ be a point where your friend or family thành viên falls behind on payments. When that happens, it’s up lớn you khổng lồ follow up with them about their late payment. And that conversation is going to lớn be incredibly awkward.
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But it gets worse. They’relikely going lớn keep falling behind on payments. And you’re going lớn have to lớn keep following up with them each time to lớn let them know they’re late.
6) It could ruin your relationship forever
After a few late payments, you’ve essentially become a debt collector for your loved one. And this fact will affect your relationship.
You’ll be upset that they didn’t pay you back which shows that keeping promises to you just isn’t a priority for them. And they’ll feel uncomfortable every time they see you because they know they owe you money. Holiday dinners và going out with your friend group will now come with a ton of baggage.
If you are going khổng lồ loan money to lớn a friend or family member, do it the right way and put an agreement in writing. Otherwise, consider your loan as good as gone.
Dani Pascarella is the Founder & CEO of One
Eleven, a financial wellness platform for corporations and universities that empowers people khổng lồ live their happiest lives.Prior lớn founding One
Eleven, Dani was an Investment Specialist at JPMorgan where she managed money for ultra high net worth individuals with at least $25 million in investable assets. She became a licensed stockbroker at age 20, is a personal finance contributor at perfectslimusa.net, và is a CERTIFIED FINANCIAL PLANNER™. Dani also holds a B.A. Và M.A. In International Business from the University of Florida và a M.S. In Journalism from Columbia University.https://oneeleven.co/