- More than half of Americans have loaned money to friends or family, and many say they never get it back.
- A detailed payment plan, including amounts and deadlines, should be created.
- Putting a group bill on a rewards card is a popular form of everyday borrowing among younger Americans, and repayment is often skipped.
Money is a complicated topic for a lot of people, and borrowing from friends and family is something most financial experts will tell you to avoid. Even in the most stable relationship, the outcome can be damaging. But amid the pandemic, it's become harder to gain access to personal loans and credit cards, as lenders are risk-averse given the state of the economy.
With a lack of traditional borrowing options, people may have no other option than turning to a family member or friend for financial aid. If someone close to you asks for money, keep these things in mind.
According to a 2019 survey by Bankrate, 60% of Americans have helped a friend or family member by lending them money, expecting to get paid back. Of those respondents, 37% reported losing money and 21% said that the personal relationship worsened.
While banks and credit card companies require applications to determine a person's creditworthiness, most people won't run a friend's FICO score when they ask for money. In fact, they probably already have a good idea of the borrower's trustworthiness. If the borrower has bad financial habits, or you know they struggle with debt, you should not feel guilty about saying no, especially if lending someone money could harm your own financial security.
"Don't lend more than you can afford to lose. Ideally, I think these arrangements are best treated as gifts," said Ted Rossman, an analyst at CreditCards.com.
It's one thing to loan a friend $20. It's another thing to lend out $2,000. Whatever the amount, as the lender you have a right to know where the money is going, especially for larger amounts.
Some financial advisors and blogs will recommend putting the agreement in writing, but Rossman warns this might not offer much protection. "I worry about enforceability. Even if you have a written agreement, you're probably not going to take your relative to court, report a friend to the credit bureaus."
Instead of a written agreement, settle on a repayment schedule. Ask the borrower to present a detailed schedule of how they plan on paying you back. This should include payment amounts, interest (if there is any) and an agreed-upon deadline.
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"I'll Venmo you" is a phrase that has become synonymous with, "I'll pay you back later."
Paying for a group bill is a quick way for rewards cardholders to earn extra points. But the rewards aren't worth it if you're not getting repaid. According to the 2019 Bankrate survey, 70% of respondents who have charged a full group bill to their credit card reported not getting paid back at least once. Nearly a quarter of those respondents, 23%, said not being paid back happened frequently.
If you are going to foot the bill, make sure that you'll get paid back. It helps to have an itemized bill, that way you can charge people only what they ordered.
"Lending to family and friends is still risky, but if you're aware of these potential pitfalls and you're careful to preserve the relationship, I think it works for some people," Rossman said.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.