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Loaning Money to a Friend
3 Apr 2019

15 Reasons Loaning Money to a Friend is a Terrible Idea

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Sharing is caring. Be a good Samaritan.

This is advice we’re always given. While it’s never bad to lend a helping hand, you should also watch your own back. This is especially important when lending money.

We will all experience a close friend asking for money. Some may be starting a business or a creative pursuit. Others just can’t get their finances in order and are constantly broke.

If they don’t have a good credit score, they may seek out your help — especially if they know you have great credit.

Is this your problem? No! Here are 15 reasons why loaning money to a friend is a terrible idea.

1. There May Be Urgency to Repay the Loan

Every loan has its conditions of how much you should pay and when you should pay off the personal loan. While some lenders are more lenient, others are very strict on fast loan repayment.

Does your friend have the money to make the monthly payments in full? If not, loan repayment is on you.

Repaying off a loan you’re not using shouldn’t be a priority.

2. The Loan Is Likely Open-Ended

An open-ended personal loan no credit check is similar to a credit card. To ensure the borrower isn’t given a huge sum, the lender offers a line of credit that can be used whenever the borrower needs it. This makes payback more flexible and affordable.

However, open-ended loans come with their faults. Since payments aren’t fixed, there are uncertainties as to when the loan will be paid back.

The best thing to do is to practice good communication with your borrower friend and the lender. Ensure your borrower friend makes all payments in full and on time.

3. It Can Ruin Your Friendship

Do you really cherish your friends? Great — don’t lend them money. Your friend may guilt trip you and you may feel loaning them money is “what friend’s do.”

But installment loans can come with a great deal of stress and you’re risking your healthy credit score. This is a recipe for a failed friendship.

Even if the loan stress doesn’t fail your friendship, things may get a little awkward for a bit. To avoid the discomfort, just decline their loan request.

What if they sweet talk you into loaning them money? Be firm about paying back the loan and try to not disclose the information with others around you. People may also end up judging you and your friend during this process.

4. Repayment Is Difficult

Paying off a bad credit personal loan is difficult as it is. But when you’re the middle man, the process becomes even more complicated. Especially since it’s your credit that’s on the line. This is why the repayment process usually comes with some conflict.

Unfortunately, the lender has no patience for late payments. If your borrower friend doesn’t make their payments, you have a decision to make. If you’re the one making the payments, that’s completely unfair.

To avoid hurt feelings and confusion, communicate the situation with the lender.

If the borrower fails to make their end of the promise, you and the lender can decide the best plan B.

5. They May Continue Asking

This is why many people don’t do good deeds. You help a friend in need. Then sometime later, they approach you with another favor.

Let’s say you already lent them money and they paid off the loan, but the process was stressful and slightly damaged your friendship. You probably think you’ll never lend money to a friend again.

But don’t be surprised if they ask you to do the same thing again. Even if that friend doesn’t ask you to lend them money, someone else in your circle may ask for a loan.

To avoid any of these situations, just decline any lending request.

6. You May Become Too Demanding or Too Passive

Let’s focus on the opposite end of the spectrum. We went over some faults you may experience with your borrower friend. But what about faults that you will commit in this situation?

Don’t be surprised if this situation causes you to become too demanding or too passive. To avoid a bad credit score and bad terms with the lender, you may be too pushy with your borrower friend.

Some also become too passive with their borrower friend to avoid any drama.

This causes them to risk their financial health.

7. Take Interest Into Account

All online loans come with interest.

You likely have a good credit score, which means you likely qualify for low-interest rates. Some loans are more flexible on interest charges and some loans even offer specials such as no interest for a certain amount of time.

But interest is still interest. These costs add up over time. If your friend is in a bad financial situation, can you trust them to make the required payments plus interest?

The interest charges can cost more than you think — and don’t be surprised if these charges end up falling in your lap.

8. Lending Them Money Isn’t Helping Them Out

You may think lending your friend money is a good way to help them when financial times are rough. You’re actually doing the opposite.

Loans have many benefits but they’re not a perfect financing option. For those who don’t have great financial health, a loan adds to their long list of debts and other things to pay off.

If they’re asking you for a loan, that’s probably because you know how to keep your finances in order. Instead of lending them money, be their mentor.

Look at their income, their spending, and their debts. Help them find a way to budget and pay off everything they owe. You can even refer them to a financial advisor.

To avoid spending money on an advisor, see if their bank offers complimentary financial advising services.

9. You Could Lose More Money Than What You Planned

When agreeing to lend a friend some money, you likely understand the risks on your end. But you may not be prepared for how much money you’ll lose.

Let’s look back at some of the points mentioned previously. The interest charges add up, your borrower friend isn’t making the full payments and may not make any payments, and the lender starts knocking on your door.

The trust you had in your friend is suddenly gone because now you’re forking over some serious cash.

What if you also don’t have the money? The items you used as collateral (if applied) are now revoked.

With this being said…

10. You Need Your Money

Sure, your friend may be suffering from a financial emergency. Or maybe they need a reliable business financing option. They need some extra money. But who else needs money? You do.

Even if you’re not in poor financial health, you still have bills to pay. You need a roof over your head and food in your stomach. You need the money you work so hard to make.

In addition, who knows if you’re stuck in a financial emergency. What if you lose your job or have a serious medical emergency? You’ll need your savings.

If your friend is going through a period of bad luck, that’s not your fault.

11. Power Dynamics Can Develop

Money and loans can be the catalyst to form power dynamics. This is when one exerts control over the other and is often not appreciated by the other party.

This situation can cause either figure to exert power. The lender friend can manipulate the borrower, making them feel they’re at their mercy because of their bad financial situation.

The borrower friend can also exert power by using the “victim card” to get what they want.

12. Legalities Get Difficult

When loaning money to a friend, you’re signing lots of contracts to both the bank and to your finances and assets. If you’re one of those who didn’t read the terms, you risk some serious legal issues if your friend doesn’t repay the loan.

Before signing any contracts, read them over carefully. Ask your lender if the contract is flexible, in case the borrower friend fails to make the payments.

Finding a reputable lender and not a scam lender also makes the world of a difference.

13. There Are Other Solutions

If you truly want to help a friend in a bad situation, there are other options aside from loaning them money.

Helping them make better financial decisions and referring them to a financial advisor were already mentioned. But what if they’re facing an emergency?

Find other ways to help them financially.

Maybe you can get them a second job. Urge them to create a crowd sharing account where you and others can donate. A loan should be your last resort.

14. They See You as a Last Resort

This is a hard pill to swallow. But your friend is likely approaching you because they couldn’t get a loan themselves and no one else is helping them out. Some may even use this fact to try and manipulate you to lend them money.

If no one is helping them out, especially their family, that probably means this person can’t be trusted.

Take that as advice to say no to their request. Even if this isn’t the case, there’s probably a reason why the bank sees them as a risky borrower.

15. Asking for Payments Isn’t Your Job or Your Responsibility

Last but not least, asking for their payments isn’t your responsibility. When they start falling behind, you have no choice but to start demanding money. This is the job of a lender, not a friend.

And don’t trust that you won’t have to ask for payments. No matter how well you think you know your friends, you don’t know how they are with money.

Bonus: Why You Should Never Borrow Money From Friends

This article isn’t only targeted to the lenders. There are facts that borrower friends need to know about borrowing money from others. Here’s why you should never accept a loan from a friend.

Asking Them Can Be Awkward

This is a point that commonly gets overlooked.

No one wants to admit defeat, especially when it comes to the financial department. Approaching them with this request can be awkward, especially if your friend doesn’t know of your bad financial situation.

Can You Trust Your Friend?

As a lender needs to trust the borrower, the borrower needs to trust the lender. You may think you can trust your friend but these situations test a friendship.

Did your lender friend receive the loan you want? Were you able to receive details from the lender? Do you know when to pay back the loan and for how much?

Your lender friend is the one who has the power in this situation. Out of a power-struggle manever, they could go against your terms or hold information from you.

And this leads to our next point…

Your Friend May Ask for More Than Necessary

Before we describe the severity of this situation, it’s best to disclose information advice to you — get information from the lender. This is essential for many reasons, this point being one of them.

When paying off your loan, ensure you’re making the correct payment amount. If your friend asks for too much, who knows if they’re pocketing the extra money.

Your Friendship Can Get Damaged

This point was emphasized for the lender and is also emphasized for the borrower. You may need money and can’t get a loan for your credit score. But is this worth risking a friendship?

You may think you trust your friend and they have your back. But these situations really test a friendship.

Whether the fault is on your part, your lender friend’s part, or even both, don’t be surprised if a loan causes your friendship to fail.

Loaning Money to a Friend: Never a Good Idea

There are few things worse than loaning money to a friend. If your friend is in desperate needs for money, refer them to a lender who will give them a chance.

We offer a variety of personal loans and credit cards for those of all credit health. Here are some other articles you might find helpful:

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