Lending money to your relatives or friends is unlike granting an SBA loan to small business owners in Ogden . While lenders demand collateral to secure payment for a business loan, you don’t have the slightest guarantee whether your BFF or family member will pay you back.
According to a survey, 46% of adults who lent cash or their credit card and co-signed a loan with family or friends suffered negative consequences. They lost their money, damaged their credit score, and lost essential relationships. Here’s why you should say no the next time a family member or a dear friend asks you for a loan:
You become a financial enabler
If your family members or close friends have a history of financial difficulties, lending them money every time will encourage their borrowing patterns. Instead of helping them fix their issues with financial management, you provide them with a quick escape from their current financial stress.
By lending them money, you willingly play the role of a financial enabler, which supports their economic dependence and mismanagement. You need to help your friends and family members solve the underlying problem. If your sibling frequently borrows your credit card to buy a product on sale, gently reject her request. Instead, help her to curb her love for a shopping spree and learn how to save for future purchases.
You are taking a significant financial risk
A contract does not govern loans between friends or family members. You don’t determine the interest rate, and you’ll feel awkward to set a timeline for repayments. When there is no deadline, the borrowers don’t feel a sense of urgency to repay the loan. Chances are, they will not be motivated to take their obligation seriously because there is no interest, no penalties for late payments, and no negative impact on their credit score.
But what if you need the money? Unforeseen events like medical emergencies and job losses happen. Non-repayments will put you in financial jeopardy and cause you anxiety. Asking for repayments from friends and family is incredibly awkward, and you will endlessly think of ways to get your money back as soon as possible without triggering ill feelings.
If you co-sign a loan and your friend defaults, it will ruin your credit score and you will not be able to apply for loans during difficult times. Worst, you will be liable for the repayments and might be forced to sell some of your assets to settle the debt.
It will damage your relationship
Late payments, unpaid loans, ruined credit scores, and lost assets will cause you to nurture resentment against your friend or family member. On the other hand, they will feel guilty and uncomfortable knowing that they owe you money, and they will avoid you at all costs.
Saying no to a broke family member or a close friend might seem selfish, but this selfishness will save your relationship and finances. However, if you need to loan them money, lend an amount that you can afford losing, assume it’s a gift, and never hope for repayments.