Chances are that during your lifetime, you’ve been asked to loan money by your friends and family a couple of times, and this is completely understandable, considering the fact that we all face tough times in life, where we do need some extra money. However, it has often been said that loaning money to family and friends is a bad idea for a couple of reasons.
In this article, we will explore some of the top reasons why you should think twice about lending money to your family and friends, especially since there are tons of banks, and lending companies that are more than willing to do the same thing for you. Not many people are aware of this, but lending money to family and friends can create a precedent, thus bringing in an unexpected number of problems.
1. Open-ended loans
Most of the times, loans made to friends and family are open-ended, which means that that both parties often don’t reach an agreement when it comes down to repayment terms such as the timeline, or interest. With this in mind, lenders often don’t know when they can expect to have their money back, and there is absolutely no guarantee that they will get their funds back, thus leaving both parties in a limbo state, where no expectations are set due to the connection between the two people. Based on this, the borrower may worry about when the lender expects the money back, and vice-versa.
This is why, whenever it comes down to lending money to friends of family, if you do want to do it, it is important to set some straight guidelines, and offer the borrowers a timeline during which they should return the money.
2. It is often difficult to ask for the money back
Absolutely no one wants to be in the shoes of a person asking a borrower for the money back. Upon lending money to friends and family, the two parties share an emotional connection, thus making it difficult for the lender to ask for the money back, while also increasing worry. Upon being asked to return the money, the borrower can end up being confused and having their feelings hurt. If you’re ever in the position of having to ask for the money back, make sure that you do it nicely, and allow the other party to understand that you need the funds for personal, objective reasons.
3. The borrower may end up asking for more
If is often not an issue if a borrower offers the money back after the agreed timeline, yet, there are times when the borrower may ask for a bit more money, and this can become frustrating to both parties involved in the agreement, thus leading to financial problems for both parts.
4. You often won’t get any interest from borrowing money
For those who are more focused on making a profit, borrowing to either friends or family will likely not bring in any profit whatsoever, as asking for an interest fee can be quite challenging, and even damage the relationship between the two parties. If a party has some money to spare, than chances are that they’d like to keep it in the bank and earn an interest, or even invest the funds into purchasing an asset that can bring in additional money.
5. You might need the money urgently
Different life situations may require people to need more money than usual. In case the lender is affected by any form of financial problem, such as losing a job, dealing with a health condition, or going bankrupt, then chances are that they may need the money back earlier than previously agreed. This can then lead to numerous issues for both the lender and the borrower, as the second party may not have the money ready for return just yet.
6. You give your friend/family member an easy way out of a financial situation
Lending often offers people a quick getaway out of a risky financial situation, yet, once a person borrows money, that doesn’t meant that their initial financial issue has been solved. In fact, it has just gotten worse. You may want to consider asking your friend or family member to find better ways of budgeting, especially if you know what the money being lent will be used for.
Based on everything that has been outlined so far, there are cases when you might want to lend money, and times when you might not want to do so. Making the difference can be essential to keeping your relationships healthy, while also not losing any money whatsoever. Based on this, it is important to learn when to say no, but also to encourage borrowers to seek out other solutions, such as payday loans, or even bank loans, which may be better suited to their needs.