We’ve all been there: A friend or family member asks you to pay the bill, pick up some cash or sign up for a loan and swears they’ll make up the deal. You feel overwhelmed, but say yes anyway.
Nearly 7 in 10 American adults (69 percent) say they have loaned money to their friends or family, according to a new survey by Bankrate. And working as a bank for loved ones has the odds of a bad ending, according to a survey of 2,225 US adults in November 2021.
But that doesn’t stop many of us from backing a loan, cashing in, or turning over our credit card. Here are the ways people said they helped a friend or family member financially:
- Money lent with the idea of repaying it (54 percent)
- Paying a collective bill expected to be paid (24 percent)
- Signing a loan or other financial product (21 percent)
- Lend someone their credit card (19 percent)
The survey found that nearly half (44 percent) of people who offered financial help to a friend or family member experienced something bad as a result. The survey data backs up a well-known financial rule: It’s best to avoid mixing friends, family and money, says Ted Rossman, industry analyst at Bankrate.
“If you really want to help, don’t lend more than you can afford to lose, and consider treating the money as a gift to reduce the potential for difficult feelings,” Rossman says.
Money hand lending: what can go wrong?
In an ideal scenario, you would give a loan to your loved one and they would pay it back to you right away. You can then feel good about helping them out of the predicament without any financial downsides.
In real life, providing financial assistance to a loved one often turns out to be sour. The survey found that those who helped friends and family financially experienced these negative consequences:
- Losing money (38%).
- Relationship damage (23 percent).
- Damage to their credit score (14 percent)
- Getting into a physical fight (7 percent).
This is a lesson that Brian Davis, real estate investor and founder of the real estate investment website SparkRental.com, learned the hard way. He loaned $12,000 to a friend who needed money to keep his business.
Davis collected the interest, put out a legal note, had he notarized and took the keys to a 1950s Porsche as collateral. Payment deadlines passed and Davis went to his friend’s house and threatened to take the car. The loan was eventually paid off, but the problems soured the friendship and caused much anxiety for Davis.
“Looking back, I probably should have actually had the car, not just the keys,” Davis says. “Better than that, I shouldn’t have loaned him money at all.”
Millennials and men are most likely to get burned
So who is opening their wallets and who is shrinking? It turns out that millennials and men are the groups most likely to get a loan for a loved one.
The likelihood of lending money to a friend or family member increases with age, with Boomers (ages 57 to 75) (61 percent) more likely to lend money, followed by GMs (41 to 56) at 53 percent. Millennials (ages 25 to 40) at 48 percent and Gen Zers (18 to 24) at 47 percent. Boomers (28 percent) and Silent Generations (30 percent) are more likely to have signed on to someone else’s financial product.
But millennials were the generation most likely to backfire with generosity. More than half (62 percent) of millennials who helped a friend or family member financially report negative consequences. Compare that with less than half (47 percent) of Gen Zers and about a third of Gen Xers (36 percent) and workers (34 percent). Men were also more likely (48 percent) than women (40 percent) to report negative consequences than financially rescuing a friend or relative.
Lending cash is more likely to lose money: 38 percent of cash lenders lost money versus 33 percent who paid a group bill, 21 percent co-signed and 21 percent lent their credit card.
But co-signing may be the riskiest step of all: One in five (21 percent) of those who signed the agreement suffered a hit to their credit score, and the same percentage lost money. Co-signing is especially problematic because you may not even know the person has paid late or defaulted until your balance goes down, says Brad Klontz, a financial psychologist and associate professor of practice at Creighton University’s Hyder School of Business.
“The risk goes up 100 times if you co-sign a loan” compared to cash lending, he says. “You are deeply jeopardizing your financial well-being.”
From a money lender to debt collection
Working as a casual banker for your son, second cousin, or college colleague can become even more stressful when they don’t proactively pay you money.
The survey found that of the 80 percent of people who say they would loan $100 to a friend or family member, only half would attempt to collect the debt while the rest would let it slide.
That’s no surprise: Raising money from a loved one, friend, neighbor or co-worker is tough, says Diana Simpson, who works with personal finance site Finance + Freedom. She lent $80 to a friend she met (yes, really) at a debt-collection job. “She paid her bill, and when payday came, she paid me,” Simpson says.
The following month, a coworker asked to borrow $120. Payday came and went, and Simpson finally tried to collect the money. The borrower got angry and “broke in”. Simpson eventually got her money back, but lost a friend.
“Getting money from people you know and love is much more difficult and challenging than contacting strangers who owe money from their old utility bills,” she says.
Tips to help a friend or family member in need
So, you know offering a financial hand to a friend or family member can go wrong, but you’ve received a plea for help. Here are five tips on how to deal with this scenario:
- See loan alternatives. One financial therapist and coach, Carrie Rattle of Behavioral Cents, recommends asking potential borrowers how to get the money. In the past, Rattle has worked with a mother whose 40-year-old daughter often asks for money. One day the daughter asked for money to pay the vet bill for surgery on her cat. With her mother’s guidance, she arranged a payment plan with her vet. “It helped her develop her own skills for dealing with these situations,” Rattle says.
- Only lend (or give) money you can afford to lose. In some cases, Klontz says, you may want to consider making this “loan” a gift to reduce the chances of relationship strain. You may also privately accept that you may not get reimbursed. “You have to be 100 percent in agreement not to see that money again,” he says.
- Be clear about the loan terms. Decide on your payment plan and schedule, including whether you will receive payments or a lump sum. The borrower might say, “Mom and Dad know I’ll pay them when I can,” Rattle says. “But does that mean after buying new clothes, getting a new car and going on vacation? Or is it just once you have cash?”
- Avoid co-signing at all costs. If you can’t afford a car loan or mortgage payments or your credit has been damaged, consider helping your loved one build their credit by directing them toward a nonprofit credit counseling agency. Or you could even offer to pay for a session with a financial planner, Klontz says.
- Keep the lines of communication open. Klontz says a friend or family member who feels uncomfortable about a loan may start avoiding the lender. Reduce the chances that the loan will cause a rift between the two of you by talking beforehand about your concerns, Klontz says, “You can say, ‘I don’t want to make this weird between us. Please let me know if you are having trouble making this payment, and we can talk. “
Finally, it’s best to try to view the loan as a business transaction, so don’t sift through every spending decision and check whether the borrower is ordering lobsters or pulling out a new iPhone for lunch. Otherwise, you may find yourself feeling resentful, says Klontz.
“It’s really hard to lend money with no strings attached,” he says.