Lending money to your friend or a neighbour is a risky affair. It could end badly. Many times, friendship has been seen coming to an end between friends because of money owed.
Or even worse, all your money can be lost. So you end up losing an important relationship, and money both.
Because you have a good heart and you think of helping your broke neighbour or friend, you lend the money because you feel that it is the moral thing to help.
Sometimes you do it because of relationship pressure while lending to someone from the family.
Why do you lend the money?
Sometimes, you just play a part in cosigning a loan. You think that will not hurt you much as you are not the one taking the credit. But you are wrong. Basically, you tend to help friends with small loans in 10 minutes.
It can come back biting you instead. Cosigning is not just recommended. It’s a legal obligation to repay the loan in case the primary borrower defaults.
It not only damages your credit score but puts you under the pressure of repaying the credit amount. Even worse, legal actions can be taken against you.
Reasons not to lend money
Let us discuss a few reasons you should not be lending money to your friends, neighbours, or extended family members.
- You’re the last resort
Any sane person will try and get the loan first from the bank or the private lenders. If they are coming to you directly, there is a catch. In all probabilities, they have been turned down the credit by banks or even private lenders. Hence they have approached you as the last option.
Or they probably have come to you in the first place and aren’t sure of returning the borrowed money.
In both cases, the risk is high. Even the small, risky lenders aren’t giving the loan, or the borrower isn’t approaching them, which signals financial trouble.
The loans given to a friend or family will either be without interest or at a much lower interest as compared to the financial institutions.
It is a lot of risks to be taken. And to what benefit? You are risking your money, relationship, and honour in the social circle. It is too much of a risk, and you stand to benefit nothing out of it.
2. You are probably not getting paid back
Research shows that more than 70% of people borrowing money from friends or family fail to repay it fully. Which means you are setting a trap for yourself?
Prepare your mind that you are doing a favour or charity. Do not expect the full amount to be back. Leave any profit from it. Rather treat it as a gift from you.
Rather than following up later, spoiling the relationship and taking the stress later, plan out how much you can spare to lend comfortably.
Only lend that amount of money which will not stress you even if it doesn’t come back. It should not hamper your future financial planning.
3. You could give rise to a genuine reason
Sometimes the loans given within the family or friends circle are for a genuine reason. Maybe a medical emergency, some surgery, or some unexpected need (while not having the time to arrange), etc.
These reasons are good ones, and the person should be helped. But what if the reason is not sound enough? You are lending out of love or care you have for the person or just because they are your family or friends.
For example, they can go to any lender and get a car loan for bad credit if they have to buy a car. In Ireland, many lenders are offering such loans. They should not ask you for everything.
There might be situations because of bad financial decisions or habits. If you bail out the person from the situation, you will reward them for their bad decisions or habits. You would never be teaching or incentivizing them to get rid of bad habits.
4. You might need the money
Unexpected situations can be a job loss or medical emergency, or some other financial emergency.
And what if it happens to you? What will you do? What if you have exhausted the pool you created for your own financial exigencies, but you don’t have it for yourself when required?
Do not borrow money. Do not lend the money unless you have a well-stocked emergency fund so that you have enough for your personal emergencies. Plan carefully.
5. Awkwardness in following up for loan repayment
It is often seen that people fail or fall behind the repayment schedule, especially when it comes to repaying a friend or family member.
And when that happens, you will follow up with your friend or family member. And then it becomes awkward. It surely hampers the relations.
It puts you in a situation where you are worried about your money too and also the relationship. You would not want to ask too much to affect the relationship. On the other hand, you would not want to pressure too much to put off the person.
And it gets worse with time. You spoil the relationship; you become bad for following often and too many times, and you lose your money. You carry the stress of following up on failing payments.
6. It puts the relationship to an end forever
And then it happens. After continued late payments and following up repetitively, you become the bad person in this situation. You become the debt collector.
You will get tired of false promises being made and turned down. It will become uncomfortable for you to come face to face with them. Festivals, events, dinners, or get-togethers, they would start avoiding you. And eventually, the relationship will fall apart.
Conclusion
It is far too risky to lend money to a friend or family member. Many lenders, banks, and private lenders lend money even to people with a bad financial history.
You are not a professional lender. Don’t be one. It’s better to be a little bitter at the start by not helping out rather than jeopardizing your money and the relationship. Even if you will help a friend or person in need, do it rightly and smartly. Decide the terms beforehand and get a proper agreement done.
