In a recent YouTube short, financial expert Dave Ramsey shared a cautionary message about the risks of lending money to friends and family. "Don't loan people that you like money because you change the relationship," Ramsey advised, underscoring how loans can often turn personal relationships into uncomfortable exchanges. According to him, once money is involved, a dynamic shift often occurs. For instance, if a friend or family member spends on perceived luxuries while still owing money, it can breed resentment. "They look and go, where'd y'all go on vacation? Why do you still owe us money? You went to Disney World," Ramsey noted, highlighting the judgement that can arise.
Ramsey emphasised the "hidden costs" of such loans, explaining that seemingly minor annoyances, like eye-rolls or passing comments, can snowball into full-blown conflicts. "This is the kind of crap that happens, and it's not even subtle in most families," he remarked, describing how these tensions can affect everything from gatherings to holiday dinners.
Financial Experts Echo Ramsey's Advice on Lending Risks
Ramsey's caution aligns with advice from financial experts, who have long warned about the pitfalls of lending to family and friends. According to Forbes, six primary reasons underscore why lending to loved ones frequently backfires and can lead to strained relationships or even financial loss. Here's a breakdown of the factors to consider before offering a personal loan:
1. Last-Resort Lending: Often, people turn to family and friends for financial assistance when traditional lenders like banks deny their loan applications. This high-risk status, while overlooked in personal settings, still implies financial vulnerability. Family members may find themselves acting as "lenders of last resort"—without the protective interest rates or terms typical in formal loans. The result? A high likelihood that these informal loans may not be repaid in full.
2. A High Risk of Default: Nearly 75% of personal loans to friends or family members aren't fully repaid, according to Finder. By viewing the loan as a gift rather than expecting full repayment, lenders can avoid financial and emotional disappointment should the borrower fail to meet obligations.
3. Enabling Unhealthy Financial Habits: Lending money, especially for non-essential needs, may unintentionally enable poor financial habits. For instance, parents often assist adult children financially, even when it's not an emergency, which can prevent them from learning essential budgeting and saving skills. CNBC advises that this approach, though well-intentioned, may inadvertently stunt financial growth and responsibility in the long term.
4. Financial Vulnerability: Maintaining a solid emergency fund is crucial, especially in light of unforeseen circumstances like job loss or medical expenses. Lending large amounts can jeopardise the lender's own financial security. According to a GOBankingRates survey, nearly 57% of Americans have less than $1,000 in savings, underscoring the importance of prioritising one's financial health over offering loans that may never be repaid.
5. Navigating Awkward Conversations: A major downside of lending to loved ones is that reminders about overdue payments often strain relationships. Repeated follow-ups on a loan can create tension, as neither party finds these interactions comfortable. As Ramsey pointed out, these discussions can turn tense, even souring previously harmonious connections.
6. The Risk of Relationship Damage: Unpaid loans frequently change the nature of a relationship. The lender, now cast in the role of a debt collector, risks damaging trust with friends or family members. The borrower, meanwhile, may feel uncomfortable around the lender, leading to avoidance and strained social interactions. Over time, this friction can disrupt close bonds, leading to lingering resentment.
Dave Ramsey emphasises the importance of setting clear financial boundaries to maintain both financial health and relationship harmony. He advises that anyone considering lending to family or friends approach it as a potential loss, unless there's a clear, written agreement outlining the terms and repayment schedule. By formalising the arrangement, lenders can protect their financial interests while limiting the chances of relationship conflict.
