You
might think helping your broke friend is the right thing to do. Yes, but in
lending money the future will answer you like I said below. By, doing so could
totally ruin your relationship. If you need some convincing, here are six
reasons why lending money to friends or relatives is a bad idea. Did you know
that more than half of people have seen a friendship end because of
money owed? Gifting the money you may do so to help in emergency but expecting
the money to come back is not going to happen.
"Neither a borrower
nor a lender be; for loan oft loses both itself and friend."
1) Think
before you leap i.e. you might actually need the money what you try to lend
Unexpected
emergencies and job losses happens to any one at any time. And when that happens,
you’ll need extra money to pay your bills and stay afloat. If you have an
extremely well stocked emergency fund, then maybe you won’t miss the money that
you lent out.
But
only less than 10% of people in this world have enough money in their
savings. So if you’re like most people, you’ll want your money back as soon as
possible. Draining your savings to help out a friend could leave you in the
same position as them in the near future.
2)
You’re a last resort
They’re
likely coming to you because they can’t get a loan from a bank. That means
traditional lenders consider them to be highly risky people to lend money and
that’s even after considering all the potential interest they could make on the
loan.
Most
loans to friends and family have a very low or nonexistent interest rate. So by
lending money to a loved one’s, you’re taking on huge amount of risk for a
fraction of the payout a bank would normally get.
3) Probably
never get paid back in full or partial
Almost
80% of people who borrow money from friends or family never paid the loan
back in full.
Rather
than expecting to get paid back, you should view the loan as a gift in your
mind. Chances are you’ll never see that money again, so only lend as much as
you are comfortable parting with.
4)
Categorizing lending money
The
majority of loans consist of parents lending money to their adult
children, children lending money to his friends, lending money to relatives, etc...
Sometimes the reason for the loan is a good one, like a one-time emergency that
was completely unexpected.
But
often times the reason isn’t sound and in rich parents case they are simply
rewarding bad financial habits of their children. If your kids think you will
bail them out of any bad financial situation they get themselves into it always,
then they’ll never be realized that they are not worth of spending money which
they don’t own. This section I would like to elaborate little more in my next coming
post.
5)
Having to repeatedly ask for overdue payments will get awkward
Since
most loans are never repaid, there’s probably going to be a point where your
friend or family member falls behind on payments. When that happens, it’s up to
you to follow up with them about their late payment. And that conversation is
going to be incredibly awkward.
But it
gets worse in many cases. They’re most likely going to keep falling behind
on payments. My personal experience was there as same I said above. Till now I can’t
get my money back from 2 known people and 1 unknown person.
6) Ruining
your relationship forever
After
a few late payments, you’ve essentially become a debt collector for your friends
circle. And this in fact will affect your relationship.
You’ll
be upset that they didn’t pay you back which shows that keeping promises to you
just isn’t a priority for them. And they’ll feel uncomfortable every time they
see you because they know they owe you money. You will lose holiday dinners and
going out with your friend group will now come to an end.
If you
are going to loan money to a friend or family member, do it the right way and
put an agreement in writing. Otherwise, consider your loan as good as gone.
Next post I will explain
about how to have a registered agreement or safe loan like having security in
place as the banks do.
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