Why does lending money to friends and family put you in real trouble?

A survey conducted by the US Federal Reserve in 2019 showed that when a person encounters a hypothetical expense of $ 400 that they can not immediately cover, the second most common approach is to turn to a loan of a friend or family member (the cost of a credit card was the first choice).

During a pandemic, people can especially turn to trusted confidants for help.

However, there is no doubt that bringing money into an interpersonal relationship can make things a little strange. We are generally very close to the people we lend to, but experts say that lending money is contrary to the social taboos about money discussion, and this close relationship is unbalanced.

This can lead to both parties experiencing complex emotions, such as shame, embarrassment and anger.

It can be difficult to get out of this kind of situation, but much of the discomfort it brings to help a friend out of his or her crisis can be avoided through clear communication, expectations, and a time frame for a repayment.

Maggie Baker, a psychologist and financial therapist based in Pennsylvania, USA, says that people talk a lot about money, but we do not ask each other in detail about our finances. “There is a kind of blackout on the whole subject of money, what you have and what you do not have,” she says.

Money is already a taboo subject, says J. Michael Collins, director of the Center for Financial Security at the University of Wisconsin in the US, which makes relationships complex and ambiguous.

“If I go to a bank and get a loan, the bank officials will know if I can repay the loan. I will sign a contract, and that contract will say that if I fail to pay, something will happen: they will hold me back. salary, or they will take my car back. ” But we do not do such a thing when we lend money to a family member or friend. ”

It is this “loose nature” of the agreement, as well as the “lack of follow-up or accountability” that makes people really anxious.

And lending money to someone means that the whole relationship changes. “If you lend to someone, they are your fault whether they repay you or not – then you are suddenly the stronger party in the relationship,” Becker says.

It changes your role in the relationship. “You are no longer just a friend or family member, but suddenly you turn into a loan officer,” says Brad Klontz, a financial psychologist and assistant professor at Creighton University in Nebraska, USA.

There is also a high degree of uncertainty for the lender, because no matter how close you are to the person you are lending to, you may have no idea how they handle financial matters. In fact, experts say, most loans are never repaid. Baker says nine times out of 10 a person does not repay the loan he got from their friend!

Klontz agrees: “You basically have to accept 100 percent that you are not allowed to get your money back.”

Often, the person asking you for the loan will prioritize paying off all their bills and other expenses before considering a repayment. Even then, this person will assume that you are so financially comfortable that you do not care if you get your money back or not!

“What usually happens is that the person who borrowed money from you will start avoiding you, and then you will start feeling resentful,” Klontz says. “You will feel that you are being exploited, and you will feel that someone does not respect your boundaries or you personally.”

“It’s a very critical moment, because borrowing money from them can ruin the relationship, and if you do not lend it, it can ruin the relationship as well, because they can make you angry because you did not help them. in those difficult times and the moment when they needed you. ”

Experts agree that if you are put in this situation without a clear plan in place to get your money back, it will probably backfire. “It’s a recipe for resentment,” Klontz says.

Of course, paying your friend a dinner or drink bill while on the go is very different from lending someone a set amount of money. But experts say that lending money to friends becomes a problem when it is repeated more than once, and when the friend expects you to keep paying his bills.

“This is the moment when you have to be very clear and tell him you’re happy to go out with him, but you will not pay for his dinner this time,” Collins says. “You have to be that kind of transparency. In front of people.”

If you’re asked to lend someone a large sum, “rule number one is to give yourself time to think about it,” Baker says, as you should consult with your partner, family members, or anyone else who shares your financial decisions.

Even if you do not have a written contract, Collins says, you need to create a payment plan with specific deadlines. If you lend someone half their rent – $ 500, for example – say, “I know you’ll be paid on the 15th of the month, how about returning the $ 500 to me on the 17th? Or if you want that amount in two pay installments. ” For $ 250 you can pay me $ 250 on the 15th and $ 250 on the 30th. ”

“Be very specific about this,” Collins says.

“It may seem hard to some people, but I will have the person who borrows from me sign a contract,” Becker said.

Becker demands that a person who lends to another person should be as specific as possible, and that he should even come up with the idea of ​​charging interest on the amount he borrowed, even if it is not the same amount as the interest which the bank gets.

“Give this person a chance to think about it and see if they really want to borrow from you and if it’s better for them to go to the bank, it should not be completely personal and will not ruin the relationship between you. . “

Regardless of the method of lending, you should completely stay away from lending to your friend who has a bad financial past.