Lending money to friends and family is often not a good idea because often than not, it puts your relationship in a threat. But when someone close to you is in serious problem and you are in a better position to help, it can be impossible to say no to them. So, what do you do? Let’s seek wisdom from Polonius, King Claudius son: For loan oft loses both itself and friend.
There you go a loan to a close friend or family most of the time results in losing both the money and the friendship.
Loans between friends and family can sometimes lead to an entirely unanticipated set of problems. Continue reading to see reasons why you should never lend money to your family and friends but if they are in a bind and you must help them, the article also has some tips to help control the damage that will come as a result of loaning them money. Would it Be Smart to Loan Money to Family and Friends? The answer is no, and here are the reasons.
Open-ended Loans
When you loan money to friends and family, it is usually an open-ended type of loan. What this means is that the two of you don’t reach an agreement for a repayment schedule, nor does it include interest. So, you will be sitting there not knowing when your money will be returned, if even it will be returned. On the other hand, the debtors don’t know when to repay the money either.
This leaves you and the borrower in a state of limbo, without any expectations. The uncertainty can result to stress as you will be worrying about when your money will be paid back as the borrower worries that you expect payments.
Pro Tip:
If you have to lend money to a friend or family member, don’t be afraid to provide them with a repayment schedule and timeline. Don’t be those guys who say “don’t worry, you are family” or “c’ mon, we are friends, we go way back.” The schedule will provide them with repayment guidelines while the timeline of the final repayment deadline.
Loans Are Not Priority
Since the loan is open-ended, the borrower will not prioritize repaying you even when they have the opportunity. Besides, there are no consequences for the borrower if they fail to repay the loan, like a penult for late payment, negative impact on their credit score or higher interest fees.
Pro Tip:
Talk to the friend or family member you are loaning the money and let them know that it should be a priority to repay back the money.
It is Hard to Ask for the Money Back
It can be daunting to ask for the money you loaned to a friend or a family member back. This is because you care about them and you don’t want to put them under pressure. Even if you did have the courage to request for repayment, the borrower will likely ask “Are you having money problems?” and then shoot yourself on foot with “no,” it becomes unnecessary for the borrower to repay the money quickly.
Pro Tip:
Come to an agreement with the friend or the family member that neither of you should feel awkward or uncomfortable because of this.
Most often the Borrower will Become you, Servant,
The borrower will always feel the pressure to please you and they might do everything you suggest even if it is an inconvenience to them.
Pro Tip:
It is up to you as a lender to ensure that the borrower doesn’t feel like your servant. If you feel the friend of the family member you loaned money feels subjugated, consider trying to ease their discomfort.
They may Ask for More
If you lend money to a family member of a friend, chances are high that this person might come back if they are in a bind. Also, you will be swarm by friends and families who will also want you to loan them money.
Pro Tip:
Avoid becoming the lender in your group or among your family members.
You Provide Fish Instead of Teaching Them How to Fish
When you loan money to family members or friends, you are not helping them but instead you providing them with an easy way out of their problems. What you need to do is help them figure out how to lift themselves out the mess.
Pro Tip:
Before lending money to a friend of a family member, try first to put them in the right position to improve themselves as far as their financial problems are concerned. Help them with money management, this is the help they will benefit them in the long run.
It is an Interest-Free Loan
Lending money to family and friends is costly because you will not be charging them any interest. Unlike if you invested that money.
Pro Tip:
It might be difficult to lend a friend or family member a loan and insert an interest in it. It is awkward, but it is not at all irrational.
You May Also Need that Money
Definitely, you loaned out the money hoping to get it back at some point, but what if you are also in trouble and you need your money? For example, you don’t have an income because you lost your job.
Pro Tip:
If you have a hunch that soon you might find yourself in financial problems, don’t loan money to friends or family members. Be honest with them and let them know that your financial situation is weak.
You Risk Losing Your Relationship and Money
As Shakespeare correctly put it, “For loan often loses both itself and friend.” If you loan your family member or friend member money, beware that you may lose the money and your relationship with them.
Pro Tip:
One of the things you need to discuss with a friend or a family member before lending them money is the risk of ruining your relationship.
To Sum Things Up
Before deciding to loan money to a friend or a family member, first, think about the consequences. Also, it is crucial to understand that sometimes loving someone includes doing something they do not want, and they may be angry or disappointed. Alternatively, you can direct them to a lending institution with affordable interest rates. You may visit best money lender in Singapore to check and compare loans that is ideal for you.
