Understanding The Major Risks Of Lending Money To Friends

by Darwin on May 5, 2017

There is no doubt that most people will face financial hurdles at some point or another. Some people might have a safety net to fall back on, having been wise enough to save money from month to month in good times. Others might be able to borrow money from their friends or colleagues.

If you find yourself in a position of financial strength, a friend may ask to borrow money from you. Is this a good idea? Below, you will learn more about the major risks involved with lending cash to friends and family members.

No Real Benefits

Professional lenders seek to make a profit from their activities. They do this by charging interest on the money they lend to others. Ordinary consumers, such as yourself, may not do this. Most people will simply lend their friends cash, without asking for any benefit in return other than continued friendship. This might be a noble way to lend, but it can also force you to take a risk that has no upside in the long run. If you do intend to lend money to your colleagues, you should consider charging interest. Just keep the rate to a minimum, so your friend does feel that you are exploiting his difficult financial situation.

An Impending Default

The unfortunate truth is that many people are forced to borrow money, because they’re incapable of managing their finances. If you’re lending money to someone that has a bad history of managing their money, you’re taking an enormous risk. It is absolutely pertinent to avoid getting yourself into a bad situation and waiting for the impending default. If you’re going to lend money to your friend, make sure that individual is responsible and will actually be able to repay it in the long run.

A Friendship Broken

Lending money to your friends can lead to major turmoil in your relationship in the future. You might believe agreeing to loan and handing over your money is the right thing to do, but it could cause major repercussions in the long run. There is a possibility that your buddy will not be able to pay their debt and this could create a fractured relationship. If your friend does indeed default on the debt, it is almost certain that your opinion of that individual will take a major hit. When you’ve come to the realization that your money is lost, your relationship will also disappear.

Turmoil Leads To Turmoil

As the old saying goes, misery loves company. Many times in life, it feels like one problem is quickly compounded by another and another. One of the biggest risks associated with lending money is not getting the money back. In actuality, this could result in your friend’s financial problems becoming your own financial problems. A lot of people feel obligated to provide their buddies with money during their times of need. Before doing so, it is absolutely essential to analyze your current situation and make sure you can indeed afford to do so. Do not lend out money that you cannot afford to lose. In other worse, always brace yourself for the worst possible outcome.

Be Prepared To Take Action

It might not seem like a good idea, but you should be prepared to take action if your friend fails to pay his or her debt. This is another major problem with lending to friends. Since you’ve known the borrower your entire life, you will probably feel bad about taking action against this individual. If you’re too good hearted and do not believe you can take these actions, you should not lend money in the first place. If you do, there is a major risk that you’ll be taken advantage of in the end.

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