|Photo by RODNAE Productions|
You may think helping your financially strapped friend or relative is the correct thing to do, but doing so could totally ruin your relationship. If you need some convincing, here are some reasons lending money to friends, family or anyone is a bad idea.
You Are a Last Resort. An individual comes to you because he or she cannot get a loan from a bank. This means traditional lenders, who add on high interest rates, consider the person to be a high risk to lending money. Most loans to friends and family have a very low or nonexistent interest rate. By loaning someone money, you are taking on a ton of risk for a fraction of the payout a bank would normally get. You can usually add anywhere from five to fifteen percent interest annually. Any amount higher is usury or illegal.
Most likely, you will never see your money. Most times, people who borrow money from friends or family never pay the loan back in full. If you have the money, just give them the funds, understanding that you will never see that money. You can also give the money as a gift.
Most loans involve parents lending money to their adult children. Sometimes the reason for the loan was a good one, like a one-time emergency that was completely unexpected. Often the reason is not to sound and parents are simply rewarding bad financial habits. If your adult children think you will bail them out of any bad financial situation they get themselves into, then there will never be reasons for them to develop good financial practices.
You might actually need the money. Unexpected emergencies and job losses happen. When they do, you will need extra money to pay your bills and stay afloat. If you have an extremely well-stocked emergency fund, then maybe you will not miss the money that you lent to someone. Only a quarter of Americans have more than $10,000 in their savings account. Therefore, if you are like most people, you will want your money back as soon as possible. Draining your savings to help a friend could leave you in the same predicament as the borrower.
Having to ask for overdue payments will eventually get uncomfortable. Since some do not repay most loans, there is probably going to be a point where your friend or a family member falls behind on payments. When that happens, it is up to you to follow up with them about their late payments. That conversation is going to be incredibly awkward. However, it gets worse. They are likely going to keep falling behind on payments. You are going to have to keep following up with them each time to let them know they are late.
ruin your relationship forever. After a few late payments, you have essentially
become a debt collector for your loved one, and this will affect your
relationship. You will be upset that they did not pay you back, which shows
that keeping promises to you is not a priority for them. They will feel
uncomfortable every time they see you because they know they owe you money.
If you are going to advance money to a friend or family member, draw up a promissory note showing when the loan is to be paid. You and the borrower sign the note. Keep a copy for yourself and give a copy to the borrower. If it is not in writing, you can say “farewell” to your loan.
Better yet, adhered to this motto, “Neither a borrower nor a lender be.”