Thinking of loaning money to a friend or family member? Read this first

Lending money to a family member or friend is a risky proposition, which could turn out badly. You could lose your money and destroy an important relationship.

Remember the advice Polonius gave his son, Laërte, in Shakespeare’s “Hamlet”: “Neither a borrower nor a lender, for the loan often loses himself and his friend.” “

Almost half (46%) of adults who loaned money to friends or family said they had a negative result, 37% said they lost money, and 21% had a damaged relationship with the borrower, according to a recent survey.

Co-signing a loan can also cause personal and financial problems. Again, almost half (45%) of those polled in the Bankrate survey who did this said they experienced a negative consequence:

  • 21% said their relationship had been damaged.
  • 20% said their credit score had been damaged as a direct result.
  • 18% said they lost money in the process.

“This data clearly shows that we shouldn’t be lending money to family and friends and that we shouldn’t co-sign loans because unfortunately about half the time something is wrong,” said Rossman. , Industry Analyst at Bankrate. “While losing money is bad enough, I think it’s worse when a relationship is hurt, as it is too often. “

Children often ask their parents to co-sign a loan when they cannot get a credit card or a car loan on their own. It’s easy to see why a parent would want to help in this situation, but many don’t realize that bail is a legal requirement that can come back and bite them.

“It’s more than recommending someone for a loan; it’s a legal promise to pay off the debt if the primary borrower doesn’t, ”Rossman explained. “Co-signers can lose money and their credit scores can be damaged if payments are not made on time. “

Co-signing can also affect a co-signer’s ability to obtain credit, as it typically increases their individual’s debt-to-income and credit utilization ratios. So even if everything goes well, there may be consequences, Rossman told NBC News BETTER.

Lending money is a financial decision, not an emotional one.

Asking for help from a family member or close friend who is at a stalemate can really touch your heart and get you to do something that you wouldn’t normally do.

If you expect to be paid back and stiffen up, that feeling of betrayal can create a lot of anger.

“It can ruin relationships,” said Bruce McClary, vice president of the National Foundation for Credit Counseling. “People often lend money in good faith and they don’t put it in writing. They don’t sit down to talk about the arrangement and what is expected. Not setting expectations and not writing them down always leads to regret.

While a front-line credit counselor, McClary saw people dip into their retirement savings or borrow money on their own to lend to a family member in need.

“It shows you how powerful the emotional element is and how it can get otherwise rational people to do crazy things with their money,” McClary said. “I have seen a lot of bad decisions that are not supported by careful consideration.”

By putting the terms of the loan in writing, it becomes a financial transaction, eliminating the possibility that the borrower could take it as a gift. Remember, there aren’t many consequences if you don’t pay yourself back. It will not hurt the borrower’s credit rating, as defaulting on a bank loan would. And there’s a good chance you won’t be chasing them.

Personal finance advisors contacted by NBC News BETTER have this advice: If you don’t feel comfortable lending that person money, don’t. If you agree to do so, treat it as a gift that will not be refunded. So don’t lend more than you can afford to lose.

“Let’s just say giving a loan to a friend or family member is like setting that money on fire,” said certified financial planner Megan Brinsfield, director of financial planning at Motley Fool Wealth Management. “Think about it hard, but at the same time giving someone money and helping them should bring joy to both parties, so it shouldn’t be done reluctantly.”

Lending your credit card also means asking for trouble

The Bankrate survey also shows the potential pitfalls of lending your credit card to a friend or family member. Of those who did this, 37% had something serious:

  • 21 percent of money lost
  • 16% said it hurt their relationship
  • 12% took a hit to their credit score

Some cardholders don’t actually donate their credit card, they just love to go out there and pay a joint bill – maybe for lunch or the movies – in order to earn credit card rewards. It’s easy to assume that others will contribute their fair share, but don’t count on it.

Among credit card holders who expected to be reimbursed, most (70%) said they had not received the money at least once (27% said it happened occasionally and 23% have said frequently).

Older millennials (30-38) were the most likely to be stiff when paying a group bill, according to the survey. They are also the most likely to try the “foot the group bill to earn rewards” strategy.

“Even getting stiffed once, will likely erase the value of the rewards you earn and more,” Bankrate’s Rossman said. “It’s a risky strategy, especially if it results in credit card debt. If you’re already in credit card debt, you’re not only subsidizing your friend or family member’s purchase, but you may also be paying interest.


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Troy M. Hoffman