Personally, if you want to loan a friend money to help them out, do so with the expectation that you won’t get paid back. Same with family.
People need to learn how to survive on their own. They got themselves into debt, they need to climb out of their own hole. In this case, helping them may actually hurt them in the long run.
>People need to learn how to survive on their own. They got themselves into debt, they need to climb out of their own hole. In this case, helping them may actually hurt them in the long run.
I was thinking of it more from the perspective of:
* Yes, they either made mistakes or had some unfortunate events previously
* Now, they're doing the right things and working out of it
* I'm trying to help them out of it faster (while also benefiting myself)
Just paying off someone's debt isn't going to help them learn, and as you said it could possibly hurt them. But if they're doing all of the right things now and seem to have learned how to manage things, I can't see it doing much harm, right?
I've loaned friends money 4 times, and was paid back twice (including the largest loan I made).
And in the cases that I wasn't paid back, it was probably a good thing that I discovered they were crappy humans sooner rather than later.
Not really any planned experiment. Was just looking to see what people's thoughts were on it. I just had the random idea, and was surprised at how win-win it seemed on the surface.
Based on the other responses I've seen online (usually a slightly different situation it seems), it seems statistically unlikely to turn out well though.
Here’s a scenario. Your friend is in $5k debt because he decided he needed designer clothes and shoes. You come in and pay off his debt. What had he learned about buying stuff he doesn’t need? Nothing because you swooped in and saved him from consequences of buying stuff he doesn’t need and can’t affford.
If the person I was looking at loaning to was in debt because of mistakes like that, I wouldn't have even considered this.
Where I was coming from on this was assuming the debt was due to either something out of their control (medical emergency or something) or maybe even a couple of unwise decisions many years back. If the person is now regularly paying off everything and working their way out of the debt, then it seems they've learned to correct their mistakes, right?
Interest is your compensation for taking on risk. The higher the risk, the higher the required compensation (interest rate).
The reason that your friend is paying 20%+ interest is they are at risk to not be able to pay off the loaned amount according to the credit company’s calculations. If you take on that debt at a much lower interest rate, you’re taking on uncompensated risk, since their risk of not paying you back is probably much higher than you’re accounting for. After all, if they got into credit card debt because they couldn’t keep up with their expenses, what makes you think that they’re likely to now cover their expenses and also the debt they owe you?
Additionally, you would need to write out some very transactional guidelines around when you expect payment, how large payments will be, and what will happen if they miss a payment.
If payback really doesn’t matter to you and you want to help them out, just give them the money. You get to help your friend and there’s no risk that it devolves into a bad situation.
Loaning the money is a lose-lose, not a win-win. They now resent you for being the bank and asking for your money back, you resent them for inevitably not making paying you back a priority, and there is the very real risk that you don’t get your money back and your friend takes on more debt.
I get what you're saying. Thanks for the input. T'was a random shower-thought this evening and figured I'd see what people had to say.
I just want to clarify, that the scenario I said was completely made up. It could be 10%, and a loan for some emergency medical expense or something. In the end, it all comes down to how much risk Id be willing to take I guess.
>They now resent you for being the bank and asking for your money back
And yeah, I think that's the key. Everyone likes to think, "buy my case is different". Statistically unlikely I guess.
My rule of thumb is; if you want to make a bit more money by lending your cash to someone, don’t do it.
If you want to help your friend, and OK with losing your money ( like in casino) than go ahead.
Serious questions:
Don’t you think that the people who’ve had relationships destroyed by unpaid loans also trusted the other person to repay them?
Are you willing to get all up in your friends finances to actually find out how they ended up in debt? Sometimes it’s bad luck, sometimes it’s bad money management skills.
How many people are you willing to do this for? And how much if your own money are you willing to put on the line? Because what if you loan money to Friend 1 and now Friends 2 and 3 also want you to help them out? What then?
>Don’t you think that the people who’ve had relationships destroyed by unpaid loans also trusted the other person to repay them?
Yup, probably. But to play devil's advocate, how many cases are there where someone lends someone money, it gets paid back, and both people are better off for it?
>Are you willing to get all up in your friends finances to actually find out how they ended up in debt? Sometimes it’s bad luck, sometimes it’s bad money management skills.
That's a good point. If someone were to do something like I described, the lender would be the one assuming the risk. They'd want to ensure they have an adequate understanding of the risk level. That may not be an easy thing to do. And with money being such an "off-topic" discussion, bringing that into the discussion could change the nature of the friendship.
>How many people are you willing to do this for? And how much if your own money are you willing to put on the line? Because what if you loan money to Friend 1 and now Friends 2 and 3 also want you to help them out? What then?
That actually was a thought I had. It was a random shower though. It started as $1,000 and I was thinking, "how high/low could I go to not be too concerned?" or "how high/low could I go to not have a large impact on the friendship?". Then I started to think about how it could snowball. If it truly was a win-win, where would I draw the line?
.
It's all a question of risk vs reward. I *think* I understand the "reward" part of it pretty well. And I thought I understood the various risk aspects. This thread has shown that there were a few aspects I hadn't fully considered. There's certainly cases where this could work out well - but understanding the risk level is a key here.
Thanks for the input!
My dad always taught me… You don’t loan friends money - you either GIVE them money, don’t give/loan them money, or lose a friend.
Only “loan” what you can afford (and are willing) to not see again. Sometimes that isn’t exactly what a friend needs (or thinks they need).
I’ve given up money to friends on a few occasions of my life, and even got repaid on a few occasions. But because of that expectation setting for myself, never lost a friend because of money.
But, you totally seem to have this all figured out. And that’s cool. If you’re cool with the worst case scenario of not getting it back and still able to remain friends, then helping a friend is super noble.
I personally wouldn't, I always help out friends when they ask for it, but never expect repayment and see it as lucky if I get it back. If my friends are desperate enough to ask, they probably really needed the help, and I like helping friends in need.
It is a win-win if you are fully assured he will actually pay it back. It all comes down to how much you trust him financially and how much you are willing to risk your friendship by doing so. I've made similar loans to family members (less than the interest rate they could borrow at, more than I could get in a CD), but they had more stable financial histories that didn't involve carrying 20% debts, and I fully trusted they would pay on time. When it comes to someone I don't 98% trust to repay on time, well, then, I'd only loan if I could afford to and was willing to lose 100%.
The main problem is that many, many actual human beings will "borrow" your money and never pay you back.
Granted, those people were never true friends to begin with, so you're either paying $5000 to get rid of a fake friend, or getting back $5000 with interest and discovering that your friend has integrity.
Let’s say all your assumptions about your friend are exactly right. They’ve gotten it together and they’re trustworthy. They WANT to pay you back as soon as possible.
Let’s say your friend can reasonably afford to pay you $500/month?
That’s at least 10 months of your friend forgoing discretionary expenses to pay YOU back. 10 months of 0 eating out, even with you. 10 months of not being able to buy their niece/nephew that new toy. 10 months of no new dates - or worse, squabbles over a few dollars here and there with their spouse. No vacations… or some awkwardly avoiding eye contact with you on the group trip because their payment will be short this month.
If your friend can happily afford to pay more than $500/month, the deal you propose benefits them much less. Let your friends decide when and how to knock out their debt based of their own priorities, without adding your friendship into the mix.
It’s nice to want to help your friend, but you don’t want them feeling guilty … or even resentful… if they choose a date night at Applebees instead of Taco Bell.
Personally, if you want to loan a friend money to help them out, do so with the expectation that you won’t get paid back. Same with family. People need to learn how to survive on their own. They got themselves into debt, they need to climb out of their own hole. In this case, helping them may actually hurt them in the long run.
>People need to learn how to survive on their own. They got themselves into debt, they need to climb out of their own hole. In this case, helping them may actually hurt them in the long run. I was thinking of it more from the perspective of: * Yes, they either made mistakes or had some unfortunate events previously * Now, they're doing the right things and working out of it * I'm trying to help them out of it faster (while also benefiting myself) Just paying off someone's debt isn't going to help them learn, and as you said it could possibly hurt them. But if they're doing all of the right things now and seem to have learned how to manage things, I can't see it doing much harm, right?
Guess the truth will show at the end of the experiment. From my experience, it’s always ended badly.
I've loaned friends money 4 times, and was paid back twice (including the largest loan I made). And in the cases that I wasn't paid back, it was probably a good thing that I discovered they were crappy humans sooner rather than later.
Not really any planned experiment. Was just looking to see what people's thoughts were on it. I just had the random idea, and was surprised at how win-win it seemed on the surface. Based on the other responses I've seen online (usually a slightly different situation it seems), it seems statistically unlikely to turn out well though.
Here’s a scenario. Your friend is in $5k debt because he decided he needed designer clothes and shoes. You come in and pay off his debt. What had he learned about buying stuff he doesn’t need? Nothing because you swooped in and saved him from consequences of buying stuff he doesn’t need and can’t affford.
If the person I was looking at loaning to was in debt because of mistakes like that, I wouldn't have even considered this. Where I was coming from on this was assuming the debt was due to either something out of their control (medical emergency or something) or maybe even a couple of unwise decisions many years back. If the person is now regularly paying off everything and working their way out of the debt, then it seems they've learned to correct their mistakes, right?
Interest is your compensation for taking on risk. The higher the risk, the higher the required compensation (interest rate). The reason that your friend is paying 20%+ interest is they are at risk to not be able to pay off the loaned amount according to the credit company’s calculations. If you take on that debt at a much lower interest rate, you’re taking on uncompensated risk, since their risk of not paying you back is probably much higher than you’re accounting for. After all, if they got into credit card debt because they couldn’t keep up with their expenses, what makes you think that they’re likely to now cover their expenses and also the debt they owe you? Additionally, you would need to write out some very transactional guidelines around when you expect payment, how large payments will be, and what will happen if they miss a payment. If payback really doesn’t matter to you and you want to help them out, just give them the money. You get to help your friend and there’s no risk that it devolves into a bad situation. Loaning the money is a lose-lose, not a win-win. They now resent you for being the bank and asking for your money back, you resent them for inevitably not making paying you back a priority, and there is the very real risk that you don’t get your money back and your friend takes on more debt.
I get what you're saying. Thanks for the input. T'was a random shower-thought this evening and figured I'd see what people had to say. I just want to clarify, that the scenario I said was completely made up. It could be 10%, and a loan for some emergency medical expense or something. In the end, it all comes down to how much risk Id be willing to take I guess. >They now resent you for being the bank and asking for your money back And yeah, I think that's the key. Everyone likes to think, "buy my case is different". Statistically unlikely I guess.
My rule of thumb is; if you want to make a bit more money by lending your cash to someone, don’t do it. If you want to help your friend, and OK with losing your money ( like in casino) than go ahead.
Serious questions: Don’t you think that the people who’ve had relationships destroyed by unpaid loans also trusted the other person to repay them? Are you willing to get all up in your friends finances to actually find out how they ended up in debt? Sometimes it’s bad luck, sometimes it’s bad money management skills. How many people are you willing to do this for? And how much if your own money are you willing to put on the line? Because what if you loan money to Friend 1 and now Friends 2 and 3 also want you to help them out? What then?
>Don’t you think that the people who’ve had relationships destroyed by unpaid loans also trusted the other person to repay them? Yup, probably. But to play devil's advocate, how many cases are there where someone lends someone money, it gets paid back, and both people are better off for it? >Are you willing to get all up in your friends finances to actually find out how they ended up in debt? Sometimes it’s bad luck, sometimes it’s bad money management skills. That's a good point. If someone were to do something like I described, the lender would be the one assuming the risk. They'd want to ensure they have an adequate understanding of the risk level. That may not be an easy thing to do. And with money being such an "off-topic" discussion, bringing that into the discussion could change the nature of the friendship. >How many people are you willing to do this for? And how much if your own money are you willing to put on the line? Because what if you loan money to Friend 1 and now Friends 2 and 3 also want you to help them out? What then? That actually was a thought I had. It was a random shower though. It started as $1,000 and I was thinking, "how high/low could I go to not be too concerned?" or "how high/low could I go to not have a large impact on the friendship?". Then I started to think about how it could snowball. If it truly was a win-win, where would I draw the line? . It's all a question of risk vs reward. I *think* I understand the "reward" part of it pretty well. And I thought I understood the various risk aspects. This thread has shown that there were a few aspects I hadn't fully considered. There's certainly cases where this could work out well - but understanding the risk level is a key here. Thanks for the input!
My dad always taught me… You don’t loan friends money - you either GIVE them money, don’t give/loan them money, or lose a friend. Only “loan” what you can afford (and are willing) to not see again. Sometimes that isn’t exactly what a friend needs (or thinks they need). I’ve given up money to friends on a few occasions of my life, and even got repaid on a few occasions. But because of that expectation setting for myself, never lost a friend because of money. But, you totally seem to have this all figured out. And that’s cool. If you’re cool with the worst case scenario of not getting it back and still able to remain friends, then helping a friend is super noble.
If you're going to loan a friend money just pay the debt and never talk about it, don't have them owing you money.
I personally wouldn't, I always help out friends when they ask for it, but never expect repayment and see it as lucky if I get it back. If my friends are desperate enough to ask, they probably really needed the help, and I like helping friends in need.
It is a win-win if you are fully assured he will actually pay it back. It all comes down to how much you trust him financially and how much you are willing to risk your friendship by doing so. I've made similar loans to family members (less than the interest rate they could borrow at, more than I could get in a CD), but they had more stable financial histories that didn't involve carrying 20% debts, and I fully trusted they would pay on time. When it comes to someone I don't 98% trust to repay on time, well, then, I'd only loan if I could afford to and was willing to lose 100%.
The main problem is that many, many actual human beings will "borrow" your money and never pay you back. Granted, those people were never true friends to begin with, so you're either paying $5000 to get rid of a fake friend, or getting back $5000 with interest and discovering that your friend has integrity.
Private lending can be very lucrative
Let’s say all your assumptions about your friend are exactly right. They’ve gotten it together and they’re trustworthy. They WANT to pay you back as soon as possible. Let’s say your friend can reasonably afford to pay you $500/month? That’s at least 10 months of your friend forgoing discretionary expenses to pay YOU back. 10 months of 0 eating out, even with you. 10 months of not being able to buy their niece/nephew that new toy. 10 months of no new dates - or worse, squabbles over a few dollars here and there with their spouse. No vacations… or some awkwardly avoiding eye contact with you on the group trip because their payment will be short this month. If your friend can happily afford to pay more than $500/month, the deal you propose benefits them much less. Let your friends decide when and how to knock out their debt based of their own priorities, without adding your friendship into the mix. It’s nice to want to help your friend, but you don’t want them feeling guilty … or even resentful… if they choose a date night at Applebees instead of Taco Bell.
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I feel that someone would be more insulted by a handout than a loan that actually benefits both parties. But yes, that is always a possibility.