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How Lending Money Can End Badly For You

lending money

It may be tempting to consider lending money to help out your cousin who just lost his job or your best friend who needs help buying a new car, but you may want to think twice before lending to them or cosigning on a loan.

Lending Money -- Good Intentions Gone Wrong

A study from Bankrate found that 60% of Americans have supported a friend or family member by lending cash with the best of intentions, and the expectation they’d be paid back. Some 17% let someone they know use their credit card, and 21% have cosigned a loan, rental agreement or other financial product.

And, more than a third of the time, these exchanges didn’t end well. According to the study, helping their friend or relative either resulted in lost money, a lower credit score, or a damaged relationship.

“I’d avoid lending cash and credit cards and cosigning,” said Ted Rossman, industry analyst at Bankrate, in a press release. “All too often, these situations end poorly.”

Potential Heartache Ahead

Lending cash triggered the most grief for the kindhearted. According to the survey, 37% of people who lent cash said they lost money and 21% said their relationship with their friend or relative was harmed.

Among those who let somebody borrow their credit card, 21% lost money, 16% said their relationship was hurt and 12% said their credit scores dropped.

For those who cosigned for a financial product such as a loan or a lease, 18% lost money, 21% said their relationship was harmed and 20% said their credit scores were damaged. Parents were most likely to cosign a loan on behalf of their child or stepchild, according to the study. Cosigners are responsible for 100% of a loan if the other party doesn’t pay it back.

If a friend or family member asks you for help covering their bills or signing a lease, Rossman recommends you don’t jump to rescue them. “Don’t feel pressured to say yes if you can’t afford to,” Rossman said in the release.

How to Support Your Loved One

Talk About Their Choices:

Is borrowing money from you the only way they can pay their bills, rent an apartment or buy a new car? Could they cut their own expenses to save more money instead? Is there a less expensive car they can buy? Could they simply fix the car they have for now? What about getting a roommate instead of your signature on their lease?

Help Them Consider Alternatives

If your friend or relative keeps asking to borrow your own credit card because they don’t have their own, help them explore other options such as student credit cards for college students and secured credit cards, which U.S. News & World Report details. Just be aware that some of these alternatives do carry higher fees and interest rates than others.

Get It In Writing

If you do decide to take on the risk and choose to lend money or cosign on a loan, plan ahead — and, if you want to maintain a positive relationship with the borrower, be prepared to never get your money back. Write out an agreement that details how much money will exchange hands, how it will be repaid and what the consequences will be if it isn’t paid by an agreed-upon deadline. Hopefully, at the very least, with a written agreement in place, you can save your relationship if something does ultimately go awry.

Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt free. Speak with a certified counselor for a free debt analysis today.

Photo by Alexander Mils on Unsplash

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