Lending money to friends is a big mistake, but there are solutions

With new mobile money-sharing apps like Venmo, Square, Paypal, and Google Wallet becoming more prominent among American adults, especially tech-savvy millennials, it has never been also easy to lend a friend $ 100 to pay.

Unfortunately, lending money can be the easiest part, getting the money back – and preserving the friendship – can be the equivalent of loaning out a root canal treatment without painkillers.

Consider these statistics from Bank of America
(BAC) – Get the Bank of America Corp report and its “Friends Again Report”, which, among other things, measures the impact of lending money to friends:

  • More than half of consumers have seen a friendship end for money owed;
  • 77% of Americans think IOUs are bad for friendships;
  • More than two in five Americans (43%) would be willing to end a relationship with a friend in order not to pay them back. (Of these, nearly three-quarters say their financial breaking point is $ 500 or less, Bank of America reports.)

“According to our study, money is cited as a key stressor in friendships, and friends prefer to talk about almost everything – like the drama in their family or even their weight – before talking about money,” Meredith says. Verdone, head of marketing agent at Bank of America.

It’s getting worse.

A recent CreditCards.com survey of 2,003 American adults found negative results for “badly do not.”

While it’s clear that many consumers are willing to lend money to their friends, the thought of asking for a refund causes tension and stress, Verdone says. “In fact, survey respondents say asking a friend to pay them back is just forgetting someone’s name as the most uncomfortable situation,” she adds. “This avoidance often leads to the severing of ties between friends, as more than half of those surveyed saw a friendship end over the money owed.”

Therefore, if you are approached by a friend or even a family member for a loan of money, weigh the pros and cons first. Unfortunately, there are usually more “cons” than “pros” in the loan / friend equation.

“There is a limit to lending money to friends,” says Thomas J. Henske, financial planner at Lenox Advisors, Inc., in New York City. “It’s rare, at larger amounts, for this to have a good ending.”

These poorer results can end in the following ways:

You will lose your friend – The loan amount in cash, in particular, can be detrimental to a friendly or family relationship. “With larger amounts of money, there is a lingering tension between two friends if a financial debt has become unsettled,” Henske said. “The money lender tends to scrutinize every item that the borrower [buys] and keep thinking in the back of their mind, “If he or she can buy this, why can’t they start paying me back the money they owe me?” “”

You won’t get the money back, even if you really need it The risk of non-payment of a friend-to-friend loan is real – “Debts between friends and family members can not only lead to resentment and the loss of a friend, in the very unfortunate event of a default, you also often lose money”, explains Steven Millstein, founder of Credit Zeal, a credit repair service company in Los Angeles. If the friendship is truly over, good luck getting the money back.

Your credit health may be at risk – When you loan a friend a large amount of money and it is not paid back, it could put you at risk of not paying your bills or paying them late, a scenario that could lead to a loss. drop in your credit rating.

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If you decide to help a friend in need, get legal protection. A dated and signed agreement is valid in court (but an oral agreement, not so much.)

“I agree that you shouldn’t lend more than what you can afford to lose, but I don’t see it as a freebie,” notes Tiffany Bradshaw, an Los Angeles-based brand marketing strategist who loaned money to “quite a few” friends. in the past. “At the end of the day, I want my money back.”

Bradshaw touts a mobile app called Shake by Legal Shield, which allows personal lenders and borrowers to create, sign and send legally binding agreements in seconds. “I can put the loan terms on Shake, have something in writing, and they can sign it and text me back.”

Yet perhaps the best attitude to take when lending money to friends is to never expect cash back. “If you’re loaning money to a friend or family member, it’s best to do it without the expectation of being paid back,” says Ryan Stewman, CEO of Hardcore Closer, LLC, in Carrolton, Texas.

“When you lend money to a loved one, getting your money back is a bonus,” he says.

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