Why You Should Never Loan Money to Friends and Family

Scrooge McDuck, the king of denying personal loans to friends and family
Scrooge McDuck, the king of denying personal loans to friends and family | Disney

Money is a notoriously touchy subject, particularly when it comes to family and friends. Financial concerns, disagreements, or strife is at the heart of many failed marriages, and pent-up jealousies or inter-family theft can put incredible strain on the strongest familial ties. Personal loans between family and friends are fairly common, however. And according to new research, the amount we ask for — and what we most often put it toward — may be a bit surprising.
iLoan surveyed more than 800 people to look at the intricacies of personal loans between family members and friends. Interestingly, almost all of the surveys respondents had asked for financial help at some point with a personal loan, with the majority of it happening during the teenage years and 20s. Perhaps most surprising was the frequency with which people ask co-workers for loans — and how often those co-workers are willing to pony up the cash.
“According to the survey, 97 percent of respondents reported they’ve borrowed money from friends or family at least once in their lifetime. The average amount over a lifetime – borrowed both by one-timers and serial borrowers – is $8,546,” iLoan’s brief says.
“Those needing a larger loan have the best luck with co-workers, receiving an average of $6,462. Per the survey, friends loan the smallest amounts, with an overall average of $3,319.”

Personal loans and getting your money back

A personal loan in action
A personal loan in action | iStock.com

iLoan also included a very large and comprehensive infographic displaying the results of its survey, which you can view at their site (it’s too large to include here). But reading through it, one thing immediately jumps out as a big red flag to potential lenders who have people asking them for financial help: Getting paid back isn’t easy.
“The bad news for friends and family that lend is that only half are paid back in full. About one-third of borrowers pay back part of the loan and 14 percent say they don’t pay back a dime. Also, nearly nine out of 10 borrowers aren’t charged interest and three-quarters have no set due date (though co-workers, brothers, and cousins are most likely to charge interest and enforce due dates),” iLoan’s team writes.
The other interesting, and perhaps most surprising element the study uncovered? That these personal loans — that often aren’t paid back in a timely manner, if at all — don’t tend to harm relationships as severely as you would imagine. In fact, some people, though relatively few, cite lending to family and friends as a way of strengthening their relationship, rather than straining it.

“When asked if loans put a financial strain on the friends and family lending money, 74 percent of borrowers say no; however, more than half of lenders say there is at least some degree of financial strain,” the study says. “Looking at the personal relationships after a loan, 83 percent say it’s unchanged and 6 percent say the relationship improves. Per the survey, relationships suffer most frequently when grandkids borrow from grandpa, or when co-workers loan each other money.”

Hand holding out money
Hand holding out money | George Marks/Retrofile/Getty Images

What can you take away from the survey? Two main points: First, if you loan money to those close to you, there’s a good chance (roughly 50%) that you won’t get the full amount back again. And secondly, that people are evidently quite forgiving and flexible in these situations, as we see by the high amount of respondents who said that a loan had not led to financial strain.
If you’re stingy with your money or happen to share a home or last name with a bunch of serial borrowers, perhaps you shouldn’t feel so bad in telling them “no” when they ask for a loan. Knowing that there’s a 14% chance you won’t see a dime of that money back will definitely give you pause. But of course, complicated family issues and friendship dynamics play an incredibly important role in these situations as well.
There may be some justification for you to clutch your wallet tight, but no one is going to be able to judge a specific situation with a specific individual — be it a friend or family member — except you. Saying “no” to those closest to you can be tough, and we know that money can cause all kinds of issues within families. But if you’re on the fence about lending to your sketchy uncle, the numbers show you may want to trust your gut, or at least be comfortable knowing there’s a good chance you’ll never see the money again. Perhaps the best advice is to never loan money to friends and family, but provide the money as a gift instead, if you’re capable and desire to do so.
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