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Avoid being an ATM on legs

by Fin24
30 May 2015 at 09:59hrs | Views
Your friend is struggling and you have some cash available. Should you lend them some money, or are you putting the friendship at risk? Fin24 explores the subject.

Everyone has been in that awkward situation: your friend needs some cash right now and he has asked you to help out.
 
There are a few reasons why people do this:

- It's a friend in need and they feel they should help;

- They don't want to risk the friendship by refusing;

- The person is really in dire straits and has nowhere else to turn to;

- You don't want to look as if you distrust your friend and don't believe their promises of paying you back;

- You feel guilty because you have so much and the friend has so little.

All of these reasons convince people they are doing the right thing. And some friends are reliable and do pay you back when they say they are going to. And then there is the rest.

Remember there is a huge difference between buying someone a hamburger and lending them the deposit for the flat they want to rent. But be wary of the friend who always forgets their wallet at home, or conveniently doesn't remember that you paid for supper the last time you went out.

Friends and money generally don't mix, as many people have found out the hard way. Here's why:

Only verbal

Promises to pay back the money are often open-ended and only verbal. It feels awkward to make a friend sign a contract, so many people just take the borrower's word for when the money will be returned. Which is often never.

Not a priority

Paying a friend back is not a priority to many people. There are always more pressing debts, such as the rent, the car payments, school fees and so forth. The loan from the friend moves to the back of the line – again and again.

There are no real and immediate consequences to not paying the friend back, except a slight social awkwardness and many people don't mind that all too much.

No interest

You get no interest. Few people would charge a friend interest on a loan, but that same money, if invested elsewhere, could have earned you interest.

Social impact

The unpaid loan becomes the elephant in the room. Social occasions become awkward, especially if you see the person spending money when they still owe you cash. It's also difficult when they just never mention it, because you feel like a nasty person when you ask when they're going to pay you back.

Misspending

Your money might get misspent. Instead of using your loan for something necessary, you could find out it was splurged on a night out on the town. This could make you feel incredibly resentful, as you have been misled and feel like a fool.

Ruining the friendship

It could ruin the friendship. An unpaid loan can spell the end of a friendship, as resentment builds up on both the part of the lender and the borrower.

The borrower may feel embarrassed, or might feel resentful as he could feel the lender doesn't really need the money back, and the lender feels he has been taken for a ride. Unpaid loans can destroy the trust on which friendships should be based. Social awkwardness can make these two former friends avoid one another after the loan incident.

Just an ATM with legs
 
A second request is insulting. If the first loan has not been paid back, and a request for a second one is made, the potential lender can feel that he or she is merely seen as an ATM with legs – not a good basis for a friendship.

Good friendships are based on respect and equality and unpaid loans can make these two things disappear.

Tough love

All you wanted to do was help, but you could be enabling the friend. A once-off crisis is one thing, but an ongoing saga of woes quite another.

If your constant bailing out of your friend is stopping him or her from taking responsibility for their own life, you are enabling their irresponsible behaviour. It might be time for some tough love.

Short on cash

You could become short of cash yourself. Your car's gearbox could need replacement and you could suddenly really need the money you lent to your friend. Pressure to pay back a loan is seldom received well.

Power change
 
Unpaid loans can subtly change power relationships. People do not enjoy feeling indebted to others, and it could make them resentful – or even jealous of their friend's better financial situation.

If you owe money to someone, you also don't feel that you can turn down any of their requests or social invitations.

In short, it is never a good idea to become the unofficial money-lender of your circle of friends.

Simply say your money is on a 30-day call account and not readily available, or tied up in investments, and that you are living on a tight budget. That is, unless you want to lend money to a specific friend for a specific reason.

But don't be shy to ask them to sign an IOU - say you have had some bad experiences before, and use that as an excuse. But it's not a good idea to make a habit of it.

Some people go as far as saying that you shouldn't lend money to a friend unless you are prepared to give it to them. But few people have that sort of cash lying around.


Source - Fin24
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