Poll: Lending money goes wrong almost half the time

We’ve all been there: a friend or family member asks you to foot the bill, find him money, or co-sign a loan and swears he’ll close the deal. You have a sinking feeling but say yes anyway.

Nearly 7 in 10 American adults (69%) say they have loaned money to friends or family, according to a new Bankrate survey. And acting as a bank for your loved ones has a good chance of ending badly, according to the survey of 2,225 American adults in November 2021.

But that doesn’t stop many of us from securing a loan, paying down money, or handing over our credit card. Here are the ways people said they helped a friend or family member financially:

  • Loaned money with the idea that it would be reimbursed (54%)
  • Paid a group bill hoping to be reimbursed (24%)
  • Co-signed on a loan or other financial product (21%)
  • Loaned someone’s credit card (19 percent)

The survey found that almost half (44%) of people who offered financial help to a friend or family member had something serious because of it. The survey data confirms a well-known financial rule: It’s best to avoid mixing up friends, family and money, according to Bankrate industry analyst Ted Rossman.

“If you really want to offer help, don’t lend more than you can afford to lose and consider treating the money as a gift to limit the potential for grudge,” says Rossman.

Lending a Financial Hand: What Could Go Wrong?

In an ideal scenario, you would give your loved one a loan and they would pay you back immediately. You might then feel good to help them get out of a traffic jam without financial inconvenience.

In real life, giving financial assistance to a loved one can often turn sour. The survey found that those who helped friends and family financially suffered these negative consequences:

  • Losing money (38%)
  • Harming the relationship (23 percent)
  • Damage their credit score (14%)
  • Entering a physical fight (7%)

It’s a lesson Brian Davis, real estate investor and founder of real estate investment site SparkRental.com, learned the hard way. He loaned $ 12,000 to a friend who needed the money to keep his business afloat.

Davis charged interest, wrote a legal note, notarized it, and took the keys to his friend’s restored 1950s Porsche as collateral. The payment deadlines passed and Davis went to his friend’s house and threatened to take the car. The loan was eventually repaid, but the problems strained the friendship and caused Davis much concern.

“Looking back, I probably should have taken possession of the car, not just the keys,” Davis says. “Better yet, I shouldn’t have loaned him any money at all.”

Millennials and men most likely to burn themselves

So who opens their wallet and who gets courted? Turns out, millennials and men are the groups most likely to see a loan for a loved one go awry.

The likelihood of lending money to a friend or family member increases with age, with baby boomers (57-75) the most likely (61%) to lend money, followed Gen X (41 to 56) at 53 percent, Millennials 25 to 40) at 48 percent, and Gen Z (18 to 24) at 47 percent. The Baby Boomers (28 percent) and the Quiet Generation (30 percent) were the most likely to have co-signed a financial product for someone else.

But millennials were the generation most likely to turn against generosity. More than half (62%) of millennials who have helped a friend or family member financially reported negative consequences. Compare that with less than half (47%) of Gen Zers and only around a third of Gen Xers (36%) and Baby Boomers (34%). Men were also more likely (48%) than women (40%) to report the negative consequences of a financial bailout from a friend or relative.

Lending money was the act of generosity most likely to result in a loss of money: 38% of cash lenders lost money compared to 33% of those who paid a group bill, 21 % who have co-signed and 21% who have loaned their credit card.

But co-signing is perhaps the riskiest decision of all: one in five (21%) co-signers have experienced a downgrade in their credit rating and the same percentage have lost money. Co-signing is especially problematic because you might not even know the person is late or defaulted until your credit runs out, says Brad Klontz, financial psychologist and associate professor of practice at Heider College of Business. from Creighton University.

“The risk is multiplied by 100 if you co-sign a loan” compared to lending cash, he says. “You are putting your financial well-being at risk in a profound way. “

From money lender to debt collector

Acting as an unofficial bank for your son, first cousin, or college roommate can become more stressful when they aren’t proactively paying you back.

The survey found that of the 80 percent of people who said they would lend $ 100 to a friend or family member, only half would try to collect the debt while the rest would drop the deal.

It’s no surprise that collecting money from a loved one, friend, neighbor or coworker is difficult, says Diana Simpson, who works with personal finance site Finance + Freedom. She loaned $ 80 to a friend she met at (yes, really) a debt collection job. “She paid her bill, and when payday came up, she paid me back,” Simpson says.

The next month, the coworker asked to borrow $ 120. Payday came and went, and eventually Simpson tried to collect. The borrower got angry and “ran away”. Simpson eventually got her money back, but she lost a friend.

“Collecting money from people you know and love is a lot trickier and more difficult than calling strangers who owe money on their old utility bills,” she says.

Tips for helping a friend or family member in need

So you know that lending a helping hand financially to a friend or family member can go wrong, but you just got a cry for help. Here are five tips on how to handle this scenario:

  • Look for loan alternatives. Financial therapist and coach, Carrie Rattle of Behavioral Cents, recommends asking potential borrowers how they might otherwise get the funds. In the past, Rattle worked with a mother whose 40-year-old daughter often asked for money. One day the girl asked for money to pay a vet bill for her cat’s surgery. With a nudge from her mother, she arranged a payment plan with the vet. “It helped her develop her own skills to navigate these situations,” says Rattle.
  • Only lend (or give) money you can afford to lose. In some cases, you may want to consider making this “loan” a gift to reduce the chances of straining a relationship, Klontz says. You can also privately agree not to be reimbursed. “You have to be 100% okay with never seeing that money again,” he says.
  • Be clear about the loan conditions. State a repayment plan and timeline, including whether you will receive payments or a lump sum. A borrower may say, “Mom and dad know I’ll pay them off when I can,” says Rattle. “But does that mean after you buy a new outfit, buy a new car and go on vacation?” Or is it as soon as you have cash? “
  • Avoid co-signing at all costs. If you can’t afford a car loan or mortgage payments, or suffer damage to your credit, consider helping your loved one build credit by referring them to a purpose-built credit counseling agency. non-profit. Or, you can even offer to pay for a session with a financial planner, Klontz says.
  • Keep the lines of communication open. A friend or family member who feels uncomfortable about a loan may start to avoid the lender, Klontz says. Reduce the risk that the loan will create a wedge between you by talking about your concerns in advance. Please let me know if you have any problems refunding this, and we can talk.

Finally, it’s best to try and think of the loan as a business transaction, so you don’t scrutinize every spending decision and wonder if the borrower is ordering the lobster or pulling out a new iPhone for lunch. Otherwise, you might feel resentful, Klontz says.

“It’s really hard to lend money without strings attached,” he says.

Troy M. Hoffman