It’s difficult to say no to a dear friend or family member who needs money. You may even feel compelled to assist your loved ones financially simply because they are important to you, and you don’t want to see them suffer.
However, lending money to family and friends has a significant risk, not just in terms of receiving your money back, but also in terms of your connection with the individual in issue.
Providing loans to loved ones is a bad idea for a variety of reasons, including enabling bad spending habits and triggering difficult talks.
Why You Shouldn’t Give Friends or Family Members Loans
Lend money to relatives and friends frequently causes more issues than it solves, for both you and the individual to whom you lend money. A bad loan to a loved one can has a variety of effects, ranging from troublesome to fatal. It’s occasionally best to say no for these reasons.
They’re unrestrictedMost personal loans between friends and family members are open-ended unless you agree to a fixed repayment arrangement. This means that neither party is aware of when payments are due, how much they should be, or whether the borrower is required to pay interest. Open-ended loans don’t specify the borrower’s or lender’s expectations or obligations, leaving you to create your own assumptions about the loan and how to manage it in the future. If you decide to lend money to a friend or family member, make a list of your expectations before giving over any money. Discuss payment terms such as due dates, quantities, and whether interest will be charged. As better, draught and sign a loan agreement to put the loan’s terms on writing.
It Isn’t Always a Priority to Pay Back DebtsBecause you adore your friends and family, repaying them isn’t usually a priority. There are no immediate penalties for late payments, such as late fees, hefty interest charges, or a low credit score, because the money isn’t coming from a financial institution. Borrowers may feel less obligated to repay the loan on time. They may think you’ll understand if they put an unnecessary buy ahead of paying you back. If you can’t count on the borrower to pay, it’s up to you to follow up and ask for the money back, which can be tough to do without putting your relationship at risk. Emotions might overpower you and obscure your judgement, leading you to accept excuses and half-promises. You don’t want your beloved one to feel so angry, ashamed, or ashamed, so bringing up repayment can be difficult, especially if it turns into an emotionally charged discussion that leaves you both dissatisfied and unsatisfied. If you’ve previously given someone you care about money and aren’t sure how to ask for return, take your time.
Avoid bringing up the matter at gatherings with other friends or family members who aren’t involved, as this will just make everyone uncomfortable. Choose a neutral location and have a one-on-one talk instead. Keep your emotions in check and be nice and truthful. Then, as a group, devise a strategy. You can at least agree on a structured repayment plan that works for all parties, even if they are unable to pay the entire sum in full.
It Can Make Family and Friends UncomfortableIt will be clearly awkward for everyone around you if you and the borrower reach a stage where the loan impairs your relationship. Conflicts can lead to drama, and your mutual acquaintances may feel compelled to take sides. It could also imply that you communicate and interact with each other less, or that you avoid going to the same activities. This may have an impact on your friends or family members, who may feel compelled to make special preparations for events to accommodate your dispute. If you’ve already reached the point where a loan you made to a loved one is damaging your relationship, make every effort to prevent one or both of you from being excluded from group occasions. Keep any conversations about money to a minimum and discuss your personal difficulties at the appropriate time and place.
The Lender Might Request MoreYou can lend money to a loved one again if you agree to do so once. That’s how a borrower could feel, at least. A small loan to help with a bill or a purchase may not appear to be a huge concern at first. A borrower can take advantage of a lender, just as a lender can take advantage of a borrower. A borrower may seek to utilise you as a personal bank account if they know you have money you’re prepared to share. When they get into financial difficulties, you become a safety net they can rely on. And that implies that their debt to you is growing at the same time as your savings account is shrinking.
If a lender asks for a second loan, it’s wise to say no (politely). Offer to assist them in other ways, such as creating a personal budget or brainstorming alternatives for whatever they wanted to use the money for. Consider recommending a public transportation pass instead of a new vehicle.
They don’t make any money because they don’t earn interest.Personal loans between friends, unlike bank-issued loans, rarely generate interest charges over time. This indicates that they are less likely to repay you. You could have earned interest from the bank if you had put the money you borrowed to a friend or family member in a high-yield savings account. Even if the amount was insignificant, it would have been something. Include an interest rate in your loan agreement if you are lending money to a loved one. It will encourage the borrower to pay and provide you with a tiny return on your investment.