When a close friend asks to borrow money, it can be difficult to say no. But before you jump in, it’s important to understand the potential hazards of lending to your friends.
Here are just a few reasons why you may want to think twice about loaning to a friend:
- Loans can become open-ended. An open-ended loan happens when neither party sets expectations for when loan payments are due, how much they should be, and if the borrower will be paying interest.
It’s tough to set these kinds of expectations with your friends – but it’s absolutely necessary if you want the loan to be paid back, and in a timely manner.
- Your financial health could be put in jeopardy. Lay-offs, unexpected expenses, or other emergencies could necessitate that you dip into your savings at any time. But what if you loaned that savings to a friend, and they can’t pay it back? It’s safest to keep your cash in your accounts.
TIP: Even co-signing on a friend’s loan can seriously hurt your credit if they don’t make payments responsibly. Always be cautious when it comes to your finances!
- It could enable poor financial habits. We all want to do all we can to support our friends. But sometimes loaning them money isn’t helpful to their long-term financial health – and may just end up enabling them to continue practicing poor money habits.
- Your friendship could become strained, or even ruined. Having to repeatedly ask a friend to pay back their loan can be awkward, causing strain on your relationship. And if they never pay you back, it could ruin your friendship forever. Think twice before you agree to a loan that could jeopardize your friendships!