"I'll gladly pay you Tuesday for a hamburger today." —J. Wellington Wimpy
You loan your friend some money, say, $100. But then they won't pay you back. And what is worse, they act like nothing ever happened. Did they forget? Are they really that cheap?
Science has the answer.
An article in the Huffington Post explains, "New research shows why personal loans to friends don't work: Financial scroungers tend to revise history and see the money as a gift, especially the more delinquent they are to pay it back, according to a new study published in the Journal of Economic Psychology."
"We thought that when loans were not paid off that borrowers would feel terrible and avoid lenders," paper co-author George Loewenstein, an economics and psychology professor at Carnegie Mellon University, told The Huffington Post.
But they don't.
The deadbeat will reinterpret what the original agreement was to be more comfortable with their own reality. They think it isn't due or that it was meant as a gift, not a loan. Meanwhile, the lender fumes and loses trust.
An AOL story at Daily Finance talks about "Vivian P." who loaned $300 to a friend who needed it to pay rent: "Vivian's resentment flared when the loan went unrepaid, and the friend regaled her with shopping stories. 'Soon after, I was desperate for money, pregnant, and terrified. I was confiding in her as a friend,' she recalls. 'I remembered I lent her the money, and she was convinced we had made a deal where I said she didn't have to pay me back.’”
In this recovering economy, it looks like this is going to happen more often. Thinkmoney.com reported on a survey in the U.K. by Aviva Family Finances: "The average amount borrowed has more than doubled over the last quarter, from £701 (about $1,108) in May 2012 to £1,545 (about $2,443) today. This is the highest figure since the Aviva Family Finances report began."
U.S. News and World Report looked at how many friends are loaning to each other, "According to a 2011 report by the National Association of Realtors, 7 percent of home buyers received a loan from a relative or friend to finance their home. And 14 percent of business owners last year reported tapping friends and family for loans to cover their costs, according to the National Small Business Association."
But if a person is going to loan money to friends, The National Foundation for Credit Counseling has some tips to help avoid ruining the relationship:
Just like in Vegas, don't risk more than you can afford to lose.
Consider the reason the borrower needs the money. Don't be an enabler.
Put all the terms of the loan in writing.
Daily Finance explains what to put in writing: "(M)ake sure to include the loan basics: the amount of the loan, interest rate, repayment schedule, collateral if necessary, and have both parties sign it." 13 comments on this story
Of course, the higher the amount, the more care should be taken, such as having a witness or using an online lending service like LendingKarma.com.
Lending Resource has another option: "If you have no expectations of getting any money back from your friend, then you have nothing to worry about. Consider your friendship loan, a gift. Your friendship will remain intact and you will not have to work out the money contract details."
There are no studies, however, that show your friend will ever recast a gift into a loan.