When lending money to friends or family, weigh the potential impact on your relationship. Based on observations and anecdotal evidence, it’s estimated that 33% to 50% of these relationships suffer noticeable damage after the loan has “run its course”. This high rate of discord stems from the fact that financial transactions can expose or exacerbate underlying issues in a relationship. The act of lending money, or the decision not to, can serve as a revealing catalyst, unmasking the true health of the relationship.
Why does this happen? Let’s break it down. Before the loan, there’s already a difference in cash flow between the lender (L) and the borrower (B). The act of lending money highlights this disparity, making B acutely aware of their debt to L. Often, the borrower’s need for cash is not a one-time issue but a persistent problem. If B struggles to repay, they might start to believe that L didn’t really need the money since they could afford to lend it out. This dynamic can strain the relationship over time.
Despite these risks, I still support lending to family and friends. It’s about understanding and mitigating the potential challenges to preserve your relationships.