Why You Should Never Lend Money to Friends or Relatives by Miss Know It All

Miss Know It All
I am a big fanof TV court cases and see my share of civil suits regarding people coming upwith outlandish reasons for not paying back their loans.

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You may thinkhelping your financially strapped friend or relative is the correct thing todo, but doing so could totally ruin your relationship. If you need someconvincing, here are some reasons lending money to friends, family or anyone isa bad idea.

 

You Are a LastResort. An individual comes to you because he or she cannot get a loan from abank. This means traditional lenders, who add on high interest rates, considerthe person to be a high risk to lending money. Most loans to friends and familyhave a very low or nonexistent interest rate. By loaning someone money, you aretaking on a ton of risk for a fraction of the payout a bank would normally get.You can usually add anywhere from five to fifteen percent interest annually.Any amount higher is usury or illegal.

 

Mostlikely, you will never see your money. Most times, people who borrow money fromfriends or family never pay the loan back in full. If you have the money, justgive them the funds, understanding that you will never see that money. You canalso give the money as a gift.

 

Most loansinvolve parents lending money to their adult children. Sometimes the reason forthe loan was a good one, like a one-time emergency that was completelyunexpected. Often the reason is not to sound and parents are simply rewarding badfinancial habits. If your adult children think you will bail them out of anybad financial situation they get themselves into, then there will never be reasonsfor them to develop good financial practices.

 

You mightactually need the money. Unexpected emergencies and job losses happen. Whenthey do, you will need extra money to pay your bills and stay afloat. If youhave an extremely well-stocked emergency fund, then maybe you will not miss themoney that you lent to someone. Only a quarter of Americans have more than$10,000 in their savings account. Therefore, if you are like most people, youwill want your money back as soon as possible. Draining your savings to help afriend could leave you in the same predicament as the borrower.

 

Having toask for overdue payments will eventually get uncomfortable. Since some do notrepay most loans, there is probably going to be a point where your friend or a family member falls behind on payments. When that happens, it is up to you tofollow up with them about their late payments. That conversation is going to beincredibly awkward. However, it gets worse. They are likely going to keepfalling behind on payments. You are going to have to keep following up withthem each time to let them know they are late.

 

It couldruin your relationship forever. After a few late payments, you have essentiallybecome a debt collector for your loved one, and this will affect yourrelationship. You will be upset that they did not pay you back, which showsthat keeping promises to you is not a priority for them. They will feeluncomfortable every time they see you because they know they owe you money. Holidaydinners and going out with your friends will now come with a ton of baggage.

 

If you aregoing to advance money to a friend or family member, draw up a promissory noteshowing when the loan is to be paid. You and the borrower sign the note. Keep acopy for yourself and give a copy to the borrower. If it is not in writing, youcan say “farewell” to your loan.

 

Better yet,adhered to this motto, “Neither a borrower nor a lender be.”