23 Aug 2023

The perils of borrowing

“Neither a borrower nor a lender be, For loan oft loses both itself and friend.”
William Shakespeare

We’ve all, at some time or other, borrowed something from a close friend or family member. But have we given it back? Borrowing is a risky business: at the frivolous end of the spectrum a friend who asks to borrow a much-coveted item of clothing or a book that you have recommended is both flattering you (you have excellent taste, and your possessions are desirable) and effectively asking you how much you trust them. It is awkward to refuse these requests, but before lending anything you should steel yourself to the very real possibility that you will not get it back. If you cannot countenance such a thought, but feel unhappy about refusing, then you will need to upfront and unemotional about your terms and conditions: “Yes you can borrow my coat, but I need it back by next weekend as I’m wearing it to the wedding” etc.

All too often the borrower fully intends to return the item but forgets to do so and gradually assimilates it into their stock of possessions. As time goes on, there is a growing feeling of embarrassment about returning it and admitting that it has been overlooked. The lender, meanwhile, feels petty about reminding the borrower, a feeling that also grows with time and – as a result – the item is never returned. Ultimately this behaviour, which is apparently innocuous, can erode trust in a friendship and, if it happens frequently, can be destructive, so it is always sensible to resist open ended borrowing and to say, at the outset, “I would like it back ….”. Undoubtedly, it’s more liberating to give something, rather than to lend it, if you possibly can. Then it is within your control to eliminate the sense of obligation and move on.

When it comes to money, the whole question becomes more highly charged. Of course, small sums of money are lent and borrowed on an everyday basis, with no ill effect. We’ve all forgotten our wallet, or come out without cash, or only have a £20 note etc. On these occasions, a friend will willingly step in, and the general understanding is that the favour will be returned, and it will all even out in the end. There is an implicit element of trust in this behaviour, a belief that both sides of the transaction will note it and ensure that there is reciprocity. If one friend is always “short of change” or seems to have permanently “forgotten my debit card” then they will gradually erode trust. The lender will begin to feel irritated, and their irritability will be considerably compounded by a feeling of pettiness (who quibbles over a cup of coffee or a bus fare?). But that is the trouble with borrowing and lending: its impact is cumulative and eventually, if the transaction is always one-sided, it can cause fractures in friendships because one friend is always the hapless giver and the other is a remorseless taker.

When it comes to loans of larger sums, beware. If a friend or family member approaches you for a substantial loan, you can be pretty sure that you are a last resort: they have been unable to obtain the loan by more conventional means (banks, building societies etc). This indicates that they are probably in a precarious state financially and may well not be able to pay you back. You will also feel obligated to charge little or no interest and may well find yourself out of pocket. For all these reasons you need to think of the loan as a gift and accept that you will probably never see the money again. It is therefore of paramount importance that you only lend an amount you are happy to part with.

Ask yourself if agreeing to a loan is encouraging or enabling irresponsible behaviour. Given that this kind of request is generally a last resort it is likely that the person you are dealing with is not a good money-manager, possibly an extravagant over-spender or even someone with a money-guzzling addiction, such as online gambling (of course you should not discount the possibility that they are dealing with an unanticipated crisis). Lending them money forces you into a position where you are monitoring their expenditure, hyper-aware of extravagance, puzzled by sudden shortfalls. Do you want to have that role in their lives? If you are lending money to your grown-up children, you may find that your acts of generosity are actually impacting them negatively, and ensuring that they will never be incentivised to develop good saving and money management habits.

You may well feel that you do not have enough money to accede to a loan request. Technically, of course, you may have the required sum in your bank account, but most of us like to have a well-stocked contingency fund, which will be indispensable if there is an emergency illness, job loss or other unforeseen circumstance. It is alarming to be put into a position where you feel obligated to forego that buffer and it is probably inadvisable to do so.

If you are asked for a substantial loan, you should, or course, always agree a re-payment schedule at the outset. Ideally, the borrower will set up a standing order on the very day of the loan. Even if it’s for a tiny amount each month, the message will be clear: there is an intention to eventually pay back the loan, not to view it as a gift in all but name. But what happens if borrowers fall behind in their payments? As a lender, you will then find yourself in the unenviable position of having to confront them about the default. These conversations can be extremely awkward, especially if you are dealing with someone who has backed themselves into a financial cul-de-sac and is panicking.

What is the impact of a loan that is clearly never going to be repaid? You may well have tired of asking and negotiating and accepted that the money has effectively gone. Your friend or family member has reneged on their agreement and the trust between you has evaporated. Every time you see them, you will be reminded of the outstanding loan. If they appear to be enjoying their lives – eating out, going on holiday etc – you may well feel that you have unwillingly subsidised them. On one level, being the lender has given you power over the borrower (you have money and they do not, and they are obligated to you), but their failure to pay you back has disenfranchised you – all you can do is simmer with resentment and feel aggrieved. The borrowers may well steer clear of you because they cannot deal with all the supercharged negative emotions the loan has engendered. What was once a firm friendship or loving family relationship has now acquired a ton of emotional baggage.  

If you are asked for a loan by a friend or family member you face a conundrum. If you lend them money you may destroy the relationship, but if you refuse to help them in their hour of need (they have presumably pursued other options) then you may also lose the relationship. The only solution to all these difficulties is to discuss them openly beforehand and to draw up a detailed payment plan with dates and targets. Talk honestly about the implications of the loan and admit that you’re worried that introducing money into your relationship may tear it apart. Offer to help with their budgeting and advise them on their financial arrangements. Break the taboo about discussing money and personal finance and confront the situation head-on. And never lend more than you can comfortably afford…


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