Top Reasons Why You Should Not Loan Money to Your Friend

Having a helpful camaraderie between friends and family is somehow a necessity to keep the relationship healthy. Of all the things that we can possibly help with, loaning money should be one that we have to give a second thought. Loans may help our pals temporarily but it might scar the relationship in the long run.

Though it’s a good thing to offer a helping hand, this article will enlist reasons as to why we should avoid loaning money to a friend or family.

Repayment can take longer

The thing with loaning money to a friend is that there is a pre-existing good relationship between the borrower and the one being borrowed from. This relationship will change the dynamic of how one views the loan. A possibility is that there is no fixed agreement as to when the money should be paid, because we are too shy to ask for it. Without a formal agreement, there is a chance that the borrower will not prioritize that loan.

Repayment can take forever because; 1) the borrower takes the relationship as an advantage for delayed payment and 2) the one being borrowed from will most probably hesitate to ask for the money back.

If loaning money to a friend is really necessary, set up a payment agreement to follow so that both parties will have proper expectations with one another.

Losing money

Friendly loans usually have no interest on them. Putting an interest rate, though smart, can make the lender come off as money-minded. So the set up usually becomes a zero-interest, zero-timeline agreement just to be seen as a good friend.

The money that was loaned to a friend now becomes a loss since it’s not within personal reach and there is no interest to compensate for the months it hasn’t been paid. The money could’ve been invested into something that would generate income in itself.

To make it a win-win situation for both parties, an interest rate, no matter how small should be added to the loaned money.

No emergency cash fund

If we loan money to a friend, it’s probably our savings or our extra money that we have lent. No person will agree to loan money if he/she doesn’t have any extra, right? But what happens when an emergency comes knocking on the front door and requires a large sum of money? We can’t expect the borrower to pay us back in an instant. They have loaned money because they don’t have any in the first place. To compensate for our lack of money, we find ourselves borrowing money or availing credit from a bank or a lending corporation. The help that we so eagerly gave will put us in a tight situation and would now create chaos of its own.

To make it a more pleasant situation for both parties, the lender should make salient, any difficult financial situations, to the borrower. It’s best to talk to them openly about it and how the money is badly needed. This way, the borrower will have the reason and motivation to pay back in a timely manner.

It can strain the relationship

According to Pheobe Buffay of the hit TV sitcom Friends, ‘money and friends don’t mix together’ and we couldn’t agree more. Money is a very delicate subject and without proper handling, it can strain any relationship.

To reduce this repercussions, both parties should address the possible negative impacts of borrowing money in the relationship. In this way, both parties will bear the knowledge of a possible scarred relationship if they decide to go down that road.

Bottom line:

Not all money loans from a friend or a family member will end in disaster. If the borrower is a prompt and honest payer, then, loaning them some shouldn’t be a problem. As a lender, we should have the responsibility to check the financial capability of a friend. If that person has a reputation of being bad at money, take that as a red flag and don’t attempt to make arrangements. There are many ways that we can help our friends who are on a tight budget that doesn’t involve loaning. We should at least consider that first.