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As rising prices and rampant Biden inflation place increasing financial burdens on Americans, consumer debt is reaching unprecedented heights. Recent statistics show a staggering increase in credit card debt, pushing it past the frightening threshold of $1.1 trillion.
At the same time, auto loan delinquencies have soared to a 13-year high, and the persistent threat of student loan debt looms large, hovering around $1.7 trillion despite the government’s frantic efforts to wipe out some of that debt.
These figures represent just a fraction of the hidden burden, including debt incurred through informal platforms such as buy now, pay later agreements, payday loans, and friends and family banking. As Americans’ debt continues to pile up, it will become increasingly likely that family and friends will ask for short- or long-term financial assistance.
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But there’s a lesson here: acceding to such requests can have dire consequences for your own family finances and, more importantly, for the very nature of maintaining friendships. Here are five reasons why you should never lend money to friends or family:
Lending money to someone close to you doesn’t just mean opening your wallet, it also means opening up trouble. (iStock)
1. Every holiday is going to be unpleasant.
Informal lending and borrowing often ends in disaster, with friendships broken and relatives estranged. If the holiday season feels awkward right now, imagine how you’d feel every time you sat down at the Thanksgiving card table wondering when your cousin Larry was going to pay you back the $5,000 he borrowed from you, only to find out he’d spent the money on a trip to Las Vegas.
To make matters worse, your sister just borrows $2,500 and buys tickets to a Taylor Swift concert. At this point, you might be thinking, “I’m the problem. Why did I lend my sister the money?”
2. It could cause problems for the IRS
A loan is a loan. So says the IRS. The IRS requires that loans between family members (and friends, of course) be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes the Applicable Federal Rate (AFR) each month.)
It is your responsibility to report this interest, and not collecting the full amount can cause problems and result in IRS penalties and interest.
3. You might actually need the money.
With 61% of Americans running out of money before payday and inflation still outpacing real after-tax wages, you may be owed money to pay off credit cards, repay student loans, or make a car loan payment.
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With many people falling behind on their retirement savings, lending money to friends and family instead of putting money into your own retirement plan is not a good idea. If you use up your own savings to help others, you may find yourself in the exact same situation six months or a year from now.
4. Never ask just once
You probably think of this loan as a one-time thing you ask for, but few people value anything other than money they’ve earned themselves. You soon realize that the $5,000 you lent is just the initial outlay, and your relatives and friends will keep asking for more money, especially if they know you’re doing well. It’s certainly a tough time for many American families, but you’re not a bank or a credit union.
To make matters worse, your sister just borrows $2,500 and buys tickets to a Taylor Swift concert. At this point, you might be thinking, “I’m the problem. Why did I lend my sister the money?”
5. It’s riskier than cryptocurrencies
Many people still say that Bitcoin is not real money and never will be. They don’t invest because they are afraid of losing all their money. Guess what? You are more likely to lose money lending to a friend who keeps changing jobs than to lose everything in cryptocurrency.
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If money is disappearing from your checking account and you’ve loaned it out, you might as well write it off: A recent Finder article estimated that Americans owe friends and family $184 billion a year.
Unless your goal is to break up with friends or family, don’t lend them money.
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