Poll: Lending money personally goes wrong almost half the time

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

Nearly 7 in 10 American adults (69%) say they have lent money to friends or family, according to a new Bankrate survey. And acting as a bank for your loved ones is likely to end badly, according to a survey of 2,225 American adults in November 2021.

But that doesn’t stop many of us from backing a loan, shelling out 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 repaid (54%)

• Paid a group bill expecting to be reimbursed (24%)

• Co-signed on a loan or other financial product (21%)

• Lent someone their credit card (19%)

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

“If you really want to offer help, don’t lend more than you can afford to lose, and treat the money as a gift to limit the risk of grudges,” Rossman says.

Giving a helping hand financially: What could go wrong?

In an ideal scenario, you would make a loan to your loved one and they would pay you back immediately. You might then feel good about helping them out of trouble 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 experienced these negative consequences:

• Losing money (38%)

• Harm the relationship (23%)

• Damage their credit score (14%)

• Getting into 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 money to keep his business afloat.

Davis charged interest, wrote a legal note, had it notarized and took the keys to his friend’s restored 1950s Porsche as collateral. Payment deadlines passed, and Davis drove 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.

“In retrospect, 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 get burned

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

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

But millennials were the generation most likely to have generous returns. Well over half (62%) of millennials who helped a friend or family member financially reported negative consequences. Compare that with less than half (47%) of Gen Zers and only about a third of Gen Xers (36%) and Baby Boomers (34%). Men were also more likely (48%) than women (40%) to report negative consequences of bailing out 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 co-signed and 21% who lent their credit card.

But co-signing can be the riskiest decision of all: one in five co-signers (21%) suffered a drop in their credit rating and the same percentage lost money. Co-signing is especially problematic because you may not even know the person paid late or defaulted until your credit has plummeted, says Brad Klontz, financial psychologist and associate professor of practice at Creighton University. Heider College of Business.

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

From lender to collection agent

Acting as an unofficial bank for your son, first cousin, or roommate can become more stressful if they don’t proactively pay you back.

The survey found that of the 80% of people who say they 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: Collecting money from a loved one, friend, neighbor or colleague is difficult, says Diana Simpson, who works with personal finance site Finance + Freedom. She loaned $80 to a friend she met (yes, really) for debt collection work. “She paid her bill, and when payday came, she reimbursed me,” Simpson says.

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

“Receiving money from people you know and love is a lot more inconvenient and 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 giving a friend or family member a financial helping hand can go wrong, but you just got a call for help. Here are five tips for handling this scenario:

Look at loan alternatives. Financial therapist and coach, Carrie Rattle of Behavioral Cents, recommends asking potential borrowers how else they might 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 veterinary 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 that you can afford to lose. In some cases, you might 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 never to see that money again,” he says.

Find out about the loan conditions. Outline 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 back when I can,’” Rattle says. “But does that mean after buying a new outfit, buying a new car and going 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 payment or are suffering damage to your credit, consider helping your loved one build their credit by referring them to a 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 avoiding the lender, Klontz says. Reduce the chances of the loan driving a wedge between you by speaking up about your concerns ahead of time, Klontz says: “You might say, ‘I don’t want this to make things weird between us. Please let me know if you’re having trouble refunding this, and we can talk.

Finally, it’s best to try to view the loan as a business transaction, so that you don’t scrutinize every spending decision and worry if the borrower orders the lobster or pulls out a new iPhone for lunch. Otherwise, you might feel resentment, Klontz says.

“It’s really hard to lend money unconditionally,” he says.

Troy M. Hoffman