Lending money to your friend or a neighbour is a risky affair. It could end badly. Often, friendship has been seen coming to an end between friends because of money owed.
Or even worse, you can lose your money. So you end up losing a meaningful relationship and money both.
Why do you lend the money?
You lend the money because you have a good heart and think of helping your broken neighbour or friend. It is because you feel that it is the moral thing to help.
Sometimes you do it because of relationship pressure while lending to someone from the family.
Sometimes, you play a part in cosigning a loan. You think that will not hurt you much as you are not taking the credit. But you’re mistaken. You tend to help friends with12 monthly loans with no credit check by direct lenders.
Cosigning is not just recommended. It can come with backbiting to you instead. It’s a legal obligation to repay the loan if the primary borrower defaults.
It not only damages your credit score but puts you under the pressure of repaying the credit amount. Even worse, legal actions can be taken against you.
Reasons not to lend money
Let us discuss a few reasons you should not be lending money to your friends, neighbours, or extended family members.
1) You’re the last resort
Any sane person will try and get the loan first from the bank or the private lenders. If they are coming to you directly, there is a catch. They have been turned down the credit by banks or even private lenders in all probabilities. Hence they have approached you as the last option.
Or they have come to you in the first place probably they aren’t sure of returning the borrowed money.
In both cases, the risk is high. Even the tiny, risky lenders aren’t giving the loan, or the borrower isn’t approaching them, signals financial trouble.
The loans given to a friend or family will either be without interest or at a much lower stake than the financial institutions.
It is a lot of risks to be taken. And to what benefit. You are risking your money, relationship, and honour in the social circle. It is too much of a risk, and you stand to benefit nothing out of it.
2) You are probably not getting paid back
Research shows that more than 70% of people borrowing money from friends or family fails to repay it fully. Which means you are setting a trap for yourself?
Prepare your mind that you are doing a favour or charity. Do not expect the total amount to be back. Leave any profit from it. Instead, treat it as a gift from you. The chances are high that the actual money will not return.
Rather than following up later, spoiling the relationship and taking the stress later, plan out how much you can spare to lend comfortably. Only lend that amount of money which will not stress you even it doesn’t come back. It should not hamper your future financial planning.
3) You could be enabling your loved one
Sometimes, the family or friends’ loans are for a genuine reason. Maybe a medical emergency, some surgery, or for some unexpected need (while not having the time to arrange) etc.
These reasons are good ones, and the person should be helped with. But what if the cause is not sound enough. You are lending out of love or care for the person or just because they are your family or friends.
You have to ensure that you aren’t supporting the person’s bad financial habits. Such as 2000 loans for bad credits.
There might be situations because of bad financial decisions or habits. If you bail out the person from the case, you will reward them with bad choices or habits. You would never be teaching or incentivizing them to get rid of bad habits.
4) You might need the money
Unexpected emergencies can happen anytime to anyone. It could be a job loss, medical emergency, or other financial crisis.
And what if it happens to you. What will you do? What if you have exhausted the pool you created for your financial difficulties, but you don’t have it for yourself when required.
Do not put yourself into a situation where you might end up borrowing money for your necessities. Unless you have a well-stocked emergency fund so that you have enough for your emergencies, do not lend the money. Plan carefully.
You are sacrificing your hard-earned savings to help a friend who might shortly end up in the same situation.
5) Awkwardness in following up for loan repayment
It is often seen that people fail or fall behind the repayment schedule, especially when it comes to repaying a friend or family member.
And when that happens, you will follow up with your friend or family member. And then it becomes awkward. It undoubtedly hampers the relations.
It puts you in a situation where you are worried about your money and the relation you would not want to ask too much to affect the relationship. On the other hand, you do not wish to pressurize too much to put off the person.
And it gets worse with time. You spoil the relation; you become bad for following often and too many times, and you lose your money. You carry the stress of following up on failing payments.
6) It puts the relationship to an end forever
And then it happens. After continued late payments and following up repetitively, you become the wrong person in this situation. You become the debt collector.
You will get tired of false promises being made and turned down. It will become uncomfortable for you to come face to face with them. Festivals, events, dinners or get-togethers, they would start avoiding you. And eventually, the relation will fall apart.
It is far too risky to lend money to a friend or family member. Many lenders, banks, and private lenders lend money even to people who have a bad financial history.
You are not a professional lender. Don’t be one. It is better to be a little bitter at the start by not helping out rather than jeopardizing your money and the relationship.
Even if you are going to help a friend or person in need, do it rightly and smartly. Decide the terms beforehand and get a proper agreement done.