why it’s not healthy to lend money to friends.I have loan money from friends and family member and lend money to friends and family member and both has not been a good preposition.
In today’s economy, it’s easy to understand how someone can find themselves in a dark place financially. On the one hand, you want to help out a loved one who’s in need. On the other hand, you’ve heard the stories about loans gone wrong. With friendships rained and families torn apart, also you might need yourself, says Irene s. Levine PhD.
Phychologist, author and producer of theFriendship. even if you’re sure the asked will pay back, it’s hard to know if you should proceed.
Remember the advice polonus gives his son. Larlerties, in Shakespeare’s “Hamlet,” “neither a borrower not a lender be, for loan off loses both himself and friends,”
According to a recent survey by bankrate.
- 21 percent reported having there relationship damaged.
- 20 percent said their credit score was damaged as a direct result.
- 18 percent reported losing money in the process.
This data clearly shows that we should not be lending money to family and friends and about half time something goes wrong,” said Ted Rossman, industry analyst at bankrate, “while it is worse when a relationship gets hurt, as it does all too often.”
In fact, loans between family members or friends can results in an entirely unexpected set of problems, consider the following reasons not to lend money to friends and family, and some tips to help you with damage control if you do agree to loan money.
1. It is financial, not an emotional decision.
Request to help a family member or close friend who’s in blind need can really tug at your heartstrings and make you do something you wouldn’t normally do.
If you need expert to be repaid and you get stiffed, that sense of betrayal can create a lot of anger.
“It can ruin relationship,” said Bruce mcclary, vice president of the national foundation for credit counseling.
“People often lend money on good faith and they don’t put things in writing. They don’t sit down and talk about arrangement and what’s expected. Failing to set expectations and write it down always leads to regret.”
When he was a front line credit counselor, mcclary saw people dip into their retirement savings or borrow money themselves in order to lend to a family member in need.
“That just shows you how powerful the emotional element is and how it can make otherwise rational people do some crazy thing with their money,” mcclary said. “I’ve seen a lot of bad decisions that aren’t backed up carefully consideration.
By putting the terms of the loans in writing, this becomes a financial transaction, eliminating the possibility that the borrower might consider this a gift. Just remember, there aren’t many consequences for.
Not going to hurt the borrower’s credit score, like defaulting on a bank loan would do, and chances are you’re not going to sue then.
Personal finance advisors contacted by NBC news better has this advice: if you don’t feel comfortable lending that person money, don’t do it. If you agree to do it, consider it to be a gift that won’t be repaid. So, Don’t lend more than you can afford to lose.
2. Loans aren’t priority.
Wiith an open-ended loan, the borrower may not realize that there is a loan. With deadline, repaying the loan becomes the borrowers last priority. The borrower won’t face any repercussion for not paying the loan, like late payments, higher interest fees, or negative impact on a credit score. Without the threat of penalties, the borrower has no motivation to take the loan seriously or to put any urgent around by repaying it.
Tuck with your friend or family member and let him or her know that repaying this loan needs to become a priority. Set a deadline for repayment to avoid any misunderstanding.
3. You enable instead of helping your friend or family me.
When you lend money to friends or family members, you give easy way out of their financial problems, instead of helping them work through their issues.
For example, your cousin may ask for some money to pay off her credit card bill, but she needs help learning how to make a budget. In that situation refuse to loan, but offer to help your cousin create a budget or o look for alternative forms of income.
Put your friends or family member in a position that improves their financial situation as well as their understanding of money management in order to trully help them. Help them sign up for personal capital so they can set up and follow a budget, this will help them in the future.
4. Lend just what you can afford to loses to your friend or family member.
Your friend or family member may check all the boxes for being trustworthy, financially stable and reliable, not “things can happen that prevent them from paying you back as originally planned,” says Byron Ellis, a certified financial planner and managing director at Ellis and Ellis, a division of United capital financial advisers in the woodland Texas.
If your loanee does get in a bind, a best friend or family member is going to be relegated to the end of the paycheck line.”Behind the mortgage company, the credit cards, the auto loans, etc,” say Ellis, now, imagine your stress level and the tension number that would rise between you both, if you actually needed that money- and she couldn’t repay you.
Bottom line: be prepared for the worst by giving only an amount that, if never returned, wouldn’t jeopardize your own savings goals bill-paying ability or other relationship.