Ways to handle a friend who wants to borrow money from you-Investing News, Firstpost

Lending money to a friend is not a very good idea. This is because we tend to remember the loans we make, but forget the loans we take. And this phenomenon, where borrowers conveniently forget that they owe a friend money, is called a “blind spot.”

“No” is a hard word to say, especially to a close friend asking for money.

Take for example the case of Supriya Thomas (name changed), a 20-year-old who works for a private company based in Mumbai. She had lent Rs 40,000 to her roommate. “I had known her for over three years and we were close friends. She needed Rs 40,000 to get admission to a foreign university. I just couldn’t say no. It was for education after all. ” After four years Thomas had not recovered a single rupee and the friend moved to London. They are no longer in contact.

Friends who borrow money are common and everyone would have encountered such cases, if not as prey, as predator.First post did a quick survey to find out how people considered lending money to a close friend. We found that the majority of respondents were at one time or another approached by a friend to lend money, that is to say quite large amounts. In one case, the amount was Rs 8 lakh.

Should we even consider lending money to a friend?

But what are the things to consider before lending to a friend in need? Is there a right way to handle the situation? Should we even consider lending money to a friend?

If you trust what psychologists George Loewenstein of Carnegie Mellon University and Linda Dezso of the University of Vienna found in their research, lending money to a friend is not a very good idea. This is because we tend to remember the loans we make, but forget the loans we take. And this phenomenon, where borrowers conveniently forget that they owe a friend money, is called a “blind spot.”

But, regardless of the blind spot phenomenon, when a close friend asks for money, most often we are forced to give, that too is pointless after all, we don’t want to spoil our relationship with the friend . But when is it okay to give?

Most respondents we spoke to said they would donate money for a medical emergency. While the amount each respondent would give varied, the average amount most were willing to lend for a medical emergency was Rs 1 lakh.

“If it’s a real need like a medical emergency, you should donate, but only an amount that you could write off immediately,” said Ranjit Dani, Certified Financial Planner. “When you write off the amount mentally, even if the money never comes or comes after a while, you don’t lose a friend. In most cases, when you lend money, there is a good chance that you not only lose money, but also lose a friend,” he says.

Suresh Sadagopan, another certified financial planner based in Mumbai, agrees. “Only lend what you are willing to cancel, save money that you won’t mind if it isn’t returned,” he says.

But what if a friend asks for money for a lifestyle expense? “Never lend,” says Sadaagopan. “There are people who come and say that they only lack one lakh for a new car. If they can’t afford to buy with their own funds, they shouldn’t buy everything. In such a case, just tell them a bloody history of your finances.

Now, if it is to make the down payment of a mortgage? Use your discretion. It would really depend on your comfort level and the relationship you have with the friend. “Whether or not to lend in such a case is entirely your choice. But, you should absolutely not agree to guarantee the home loan, under any circumstances,” Sadagopan says. (For more on loan guarantees, read the Firstpost articles here.)

If you are lending to start a business or as seed capital, most respondents said they would not be comfortable charging interest. The experts we spoke to, however, are of the opinion that when it comes to business loans, it is better to charge interest and have a written agreement. Set payment schedules and accept post-dated checks.

“If possible, try to get equity in the business itself, but only if the person knows what they’re doing and has a solid business plan in place,” advises Dani.

Whatever the reason for the loan, you must ensure that the investment is not in a difficult financial situation.

“If a friend usually asks you for a loan and you realize they do the same with other friends as well, you need to be careful,” says Rajan Bhonsle, MD, founding director of the Heart To Heart Counseling Center.

“There are pathological borrowers who enjoy borrowing money. It’s like an obsession. And that person might also need professional advice,” he says.

And then there are friends who borrow from several people at the same time to finance their needs. They borrow and repay each other’s debt. “As a general rule, never make a loan again, unless you got back what you lent out in the first place,” Sadagopan says.

We’re not saying all friends are out to trick you. But if you believe what psychologists say, people try to forget when they borrow. So think carefully before lending. Do not fall into emotions.

Here are five questions for you. Answer it in the comments section.

1) Has a friend ever asked you to lend him money?

2) What was the maximum amount requested?

3) Assuming a close friend is in need, what is the maximum amount you would be willing to lend in the following circumstances?

a) in an emergency

b) in case your friend is looking for a down payment on his house

c) for a lifestyle / boarding need

d) set up a business

4) What do you think about charging interest on this loan?

5) How long do you expect to be reimbursed (in months)?

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