(Today’s guest post comes from a regular reader, Stacy B Miller. Stacy experienced a problem in lending to a friend as I suspect we all have. I hope her story helps you make a decision about lending/borrowing arrangements with your friends/relatives in the future.)
When we face financial problems, there are many ways to solve them and restore our mental peace. We can take out a personal loan from a financial institution, enroll in a credit counseling program or borrow from our friends and family. Obviously, the easiest option is to seek financial help from a friend or relative, but is it a sensible option? Not really.
Here are a few consequences of borrowing money from friends and relatives. I bet when you come to know them, you will think twice before entering into this relationship straining deal.
- Your friendship ends when you borrow money
Money is one reason many relationships have ended on a sour note. Let me share my personal experience. Two years back, a close friend of mine was in a financial crisis. Her mom was not well. She was hospitalized for several days and had to undergo two major operations. She needed money desperately. She called me one day and asked if I could sell her gold jewelry to cover these medical expenses. The amount was huge. Medical insurance covered only 60% of the cost and the rest she had to pay out of her own pocket.
I decided to help her out. I loaned her the remaining 40% of the hospital bill to save her mom’s life. I didn’t expect her to return my money right away since she was going through a lot at the moment. Her mom recovered gradually but my friend lost her job due to too much time away from work helping her mother.
My friend started tutoring students after her mom returned home. It helped her bring in enough income to survive. I was happy for her. Gradually, her financial situation improved. Then she began taking 3-4 trips a year with her mom’s money but didn’t pay a penny to me. I kept mum just for the sake of our friendship. But when she didn’t make any effort to pay anything, even after 2.5 years, in spite of her frequent vacations, I lost my temper.
When I asked her to repay the loan, she gave me yet another sob story. She said, “Stacy, I know you have waited for a long time. But I don’t have the money. I’d have to sell my jewelry to pay off the debt. I can’t ask mom to give me money since that would hurt my self-pride”.
I was flabbergasted. I was angry, frustrated, and irritated. In fact, our friendship ended on that very day. I was done with her excuses.
- Your bond with the family members can break down
When you’re in financial difficulty, you feel tense and judged. When you take out a personal loan from a family member, you feel defensive about your actions. Your family members judge you every moment just because you have taken out a loan from them. Suppose, you decide to go for a short trip over the weekend. Your family members may feel that it’s an unnecessary expense, and this can lead to a major fight. You may argue that a short trip wouldn’t make a big difference. Plus, you have saved money for it. Your family member can remark that “You should be paying your debt to me before going on weekend trips”. Such words hurt a lot. They bring down your morale and ruin your relationship with your family members.
A bank won’t pester you about your spending habits. A bank won’t discourage you from buying designer accessories or going out to dinner. Lenders are not bothered with your spending habits. As long as you make the monthly payments, they are content. Friends and relatives are not as impartial as the bank.
- Lack of clarity can lead to misunderstandings
One of the benefits of taking out a loan from a friend is they don’t require legal documentation. But this benefit actually becomes a major disadvantage when the lender and borrower have different expectations.
Suppose you borrow money from a friend to set up a business. Now your friend may assume that she will have a stake in your company or a voice in business dealings. On the other hand, you assume that it’s okay to miss monthly payments. After all, the lender is a friend. So she will understand your situation. This may cause misunderstandings.
If you really want to borrow from a friend or relative, document the loan terms and conditions on a proper loan agreement. You can consult a business attorney for this. The attorney can outline the repayment terms, interest rates, and late fees on a promissory note. Additionally, the promissory note should specify what may happen if the business collapses in the future.
- It can lead to an awkward situation
Despite outward appearance, your friend may not be as financially affluent as you think. Just because your friend wears designer clothes, doesn’t mean she has enough savings to lend you money. This can create an awkward situation for both of you. Your friend has to explain why she can’t lend you money and deny your request. This may make you both feel bad.
Conclusion
Taking out a personal loan from a friends or relative may seem like the easy option, but it can lead to serious troubles. You can lose your relationship forever. Also, this may not solve the underlying problem that got you into trouble in the first place. Consider seeking financial advice from a credit counselor before taking this dangerous step. A good credit counselor can suggest various ways to solve your financial problems. He can suggest money saving tips, budgeting techniques, ways to avoid overspending, and help you get back on the right financial track. Consider family and friends as your last option to solve your financial problems, since it may create more problems than is solves.
Editor’s note: I have made personal loans to friends/relatives in need on three occasions. Two of them made their first payment with checks that bounced and then made no other payments. The other never made a payment. One did contact me four years later wanting to square up. He asked what he owed me. When I gave him the figure, with the interest compounded that he agree on, I never heard from him again. He did have a nice new boat by then that cost way more than he owed me. I have lost 100% of the friend/relatives that I “helped” by loaning money. They never contact me anymore. What has been your experience? Did it go well? Would you do it again?
If debt is becoming a problem in your life, pick up a copy of my book, The Doctors Guide to Eliminating Debt or contact me for a one-on–one financial makeover.
Stacy B Miller is an established member in FICO forums and participates there to eliminate the stigma of debt and show readers the best options for handling their own debt. You can connect with her on her Facebook and Twitter sites.
I have loaned to family/friends on five occasions to people I believed were ethical/honest/moral people. In one situation the loan parameters were fuzzy. The other four required explicit loan details including a listed collateral, payback schedule and other details.
Quess which one was problematic. Even that one was resolved mostly satisfactorily with a frank discussion.
In all cases relationships were IMPROVED through the process.
I wouldn’t hesitate to loan again, but I must trust the individual and have a signed contract with explic details. The key to a happy outcome is full understanding.
Some “loan” with the idea of not requiring full payment. I don’t like that as it facilitates the undermining of the recipients character.
Russel,
Some good advice. Make sure everyone knows the deal.
I have needèd to loan money to family but I have loaned to friends for special projects but never because they had no income. Fortunately for me they paid it back.
Phil,
Glad it worked out for you.
It feels good when friends appreciate your efforts and pay you back. You get the zeal to help them in their bad times again.
Definitely a touchy subject and fortunately I have only had a few occurrences when I was asked to bridge the financial gap from a friend.
You are absolutely right that money can effect a relationship and that if you haven’t been paid back you don’t want to see that person spending on anything you deem a luxury (like the vacation example from the post).
I also feel that in some cases it only enables that person from actually making change themselves for the better. If they can always expect handouts etc they can continue going on their spendthrift ways and have no accountability.
Xrayvsn,
Thanks for your comments. It is a touchy subject.
Whenever I have a lender become (family and friends), in my mind I do not expect to be paid back. This prevents poor feelings on my part (personally) and prevents the destruction of the personal relationship with the person I have lent money to. I have not done it very often with large amounts (over $1K); these loans have not been paid back. Small amounts I have usually been paid back, but took a long time and was unexpected. So, whenever a personal loan has been paid back, the returned money feels like a windfall!
On one occasion I borrowed a considerable sum of money from my uncle ($55K). This was because I was in a horrible divorce in 2006-2007, and my ex was with intent making everything cost way too much specifically to hurt me. I lost almost everything financially and physically (including clothing, home, vehicles, personal possessions), but was able to keep my business (method of income) thanks to the wise decisions of the Honorable Judge Wolke. This legal process took almost two years and resulted in almost $65K in legal expenses. I began paying my uncle back $300.00 per month when I finally was back on my feet in 2014, which I increased to 400.00 per month in 2015. My mother passed away in 2015 and I had a monetary inheritance which would have allowed me to pay the debt to my uncle 100% in full including interest. He however did not want that (I actually mailed him a check). I felt I owed him, so he settled for a 50% payment of the debt. Then he told me that he had not really ever expected me to repay him and he actually didn’t know how much I owed him because he had not been keeping track (I had maintained a ledger on the debt). I, however, felt obligated to pay this debt. I feel so grateful that my Uncle Clarence was in a position to financially help me when I was in such dour circumstances and had no one else to turn to.
Since then God has blessed me with a beautiful wife and partner, Jolene. We are debt free and building our dream home using savings and equity from our existing home. Our new home is scheduled for completion in September 2018. Once we are moved in, our present home will be sold, our HELOC paid off (haven’t touched it yet, but will soon) , and any other construction debt will also be paid off. We will then be debt free in our new home. God is good!
I am convinced our financially situation would not be as blessed were we not to faithfully tithe. In our financially planning, we consider giving first, prior to whatever other goals we have. If doing something means we must cut back on our giving, that’s one of God’s ways of telling us that we need to consider a different solution. In building our new house, this meant that we had to downsize in order to stay within our budget and remain debt free.
Jim,
We all could use an Uncle Clarence. Best of luck on the new house and congratulations on the debt freedom.
I love the pic! I have always just given the money when it came to family. I never LOAN money since if I can’t afford it, I don’t loan it.
My friends and I usually split larger expenses if they come up on travel. No one wants to take money from the other. I think we all understand that ruining friendships over money is simply not worth it.
My mother loaned money to my sister for her house payments. It was 15K. It took my sister 15 years to repay it and she was taking trips for years while my mother never does. So yeah, this stuff happens all the time. People do all kinds of silly things because of money.
Dr. MB
Glad to hear your sister eventually paid it back. I have seen so many “loans from mom” that are treated as if they were gifts.
I wish to know how your sister would have reacted if your mom borrowed from her and paid it off after 15 years.
I loaned some money to my brother when he was divorcing. He needed money for a house down payment. He repaid me several years later with interest. I was surprised. In general I think it is a good idea not to lend money to friends and family.
Hatton1,
I’m glad your loan had a happy ending.
Lucky guy!!! Your friend is a smart and honest guy. Most friends don’t pay interests.
I struggle with this issue every month. I don’t lend money to family i simply give it because I know it won’t be paid back. I have a hard time saying no to family members when I know they are struggling financially and have children. I read lots of physician financial blogs but few touch upon this subject. As the only physician in the family I’m the one who has “made it”. I’ve had the I’m not a piggy bank discussions but eventually the cycle starts all over again. I’d like to find a balance where I can help my family at times and still have a relationship but I’m beginning to lose hope. Thanks for your post
Slodoc84,
Being thought of as the “piggy bank” of the family is never a good spot. Best of luck in solving that one. Those who borrow from you once, are likely to come back for more easy money. It’s a lot harder to borrow from the bank.
What can I say? You’re doing the biggest mistake of your life. Stop treating yourself as a piggy bank. Everyone will take you for granted. You have to say ‘no’ sometimes. What will your family members do if something happens to you? How will they survive? Don’t take all the responsibilities on your shoulder.