Did you know that more than half of people have seen a friendship end because of money owed?
You might think helping your broke friend is the right thing to do, but doing so could totally ruin your relationship. If you need some convincing, here are six reasons why lending money to friends or family is a bad idea.
1) 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 too high risk to lend money to — 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 loaning a loved one money, you’re taking on a ton of risk for a fraction of the payout a bank would normally get.
2) You’ll probably never get paid back
Nearly three quarters of people who borrow money from friends or family never pay 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.
3) You could be enabling your loved one
The majority of loans consist of parents lending money to their adult children. 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 helicopter parents are simply rewarding bad financial habits. If your kids think you will bail them out of any bad financial situation they get themselves into, then they’ll never be incentivized to develop good money habits.
4) You might actually need the money
Unexpected emergencies and job losses happen. And when they do, 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 a quarter of Ghanaians have more than 10,000 Cedis in their savings account. 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.
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. They’re likely going to keep falling behind on payments. And you’re going to have to keep following up with them each time to let them know they’re late.
6) It could ruin your relationship forever
After a few late payments, you’ve essentially become a debt collector for your loved one. And this 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. Holiday dinners and going out with your friend group will now come with a ton of baggage.
NOTE: 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 charity.