Why lending to people who need to borrow is a bad idea

Many in the FI community detest DEBT and I do see its uses but I don’t like how we actually use it. The worst situation to be in is to have someone wanting to borrow money from you – what should you do?Debt has been around for a long time – since before there was money and it can be both a creative and destructive force. In the FI community, there is a lot of debate back and forth about debt with many people detesting it; some because they’ve had to fight against it for many years. If you have £50,000 of debt at 5%, the first £300 a month you earn goes just to paying that. And in the UK and worldwide many people live perpetually in debt – often people who appear to be otherwise wise, wealthy and responsible people but they are only a few paychecks from the food bank.

Credit is a funny thing because it allows you to buy things that you just don’t have the money to buy. The problem is that often not having the money is the same thing as not being able to afford something. With debt in the form of a credit card, bank loan, overdraft or whatever, you can not only get what you want NOW, but you can simultaneously not have the money for it and not be able to afford it. Spending using someone else’s money is a good way to end up paying twice and debt payments can ruin you.

On a personal level, I feel that the poor souls who used payday lenders are in some way victims, in others I am not at all sympathetic. There will always be more in the way of what you want to buy/own/experience/have/wear/consume/collect than you have the money for. Part of a happy life is to know what you can afford and to be happy with less than that. The opposite is as Micawber pointed reminds us:

Image result for micawber

Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

If you are thinking of lending any money to anybody you know, are you just giving them money for them to spend and they don’t have a realistic intention to repay you?

Borrowing to invest is fine – be it for a business loan or student loan. And you can borrow to save money (refinancing other debts, buying a house with a mortgage vs. renting – GFF is saving about £260 a month based on our current debt burden vs. our old rental; it can also make sense to spread repayments out for big ticket items like kitchens, sofas – although I always ask if there is a cash payment discount available (but often not).

But borrowing money to allow you to continue unsustainable consumption and a lifestyle that is beyond your means is just stupid.

If you ever hear people who are careless with money complaining about a large bill for the vets (wtf?), car repair or fancy school trip that their kids wants to go on, they often neglect to mention their TV/entertainment package at home, the car (fancier than yours) on finance and 101 others ways they’ve spent all the rest of their money

If you are approached by anyone who is is using your friendship or relationship as a lever to have them lend you money – think very carefully if this is just to allow them to keep doing what they are doing or if it is to allow them to make a change in their lives. One way will lead you to getting your money back and keeping your friendship and the other will lead to you losing your money, your relationship and make you feel bad about wanting to get your money back.

Thanks, GFF

8 comments

  1. Both my partner and I have previously been approached by family members “needing” to borrow money and the results have been predictably problematic. I let my brother live in a house I was refurbishing on condition that he do some painting and minor work in exchange for a token amount of rent. In the end he stopped paying after 2 months and painted one room pretty badly. He maintained that he was broke despite being able to have fast internet and cable TV installed. He was also able to find money for smoking and takeaway food. It caused me a lot of relationship problems and I finally had to ask him to move out. I have repeatedly tried to help him with advice rather than money but he’s continued on his chosen path. The year he stayed in that house probably cost me about £5,000 and I’ve written that off now. When people come to you and ask to borrow they tend to make you feel guilty because you have it and they don’t. What tends to be forgotten is the underlying reason why you have it and they don’t. There will be occasions where people are genuine and will commit to repaying you but family and friends have been known to exploit that relationship sometimes to breaking point.

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      • It rather depends on who you ask. I suspect my brother sees me as the bad guy as I’m in a position to help but now refuse to do so. I will continue to offer advice and support but not money. Others may also judge me similarly but until you are in the same position you can’t fully understand. I had many sleepless nights when deciding to take a tough stance. Over the course of the problematic year I continued to be sympathetic and understanding but it led to further excuses and empty promises. After a year I’d had enough and had to put my own needs first. I’ve never asked any family member or friend for money and hope that I will never have to. My Father gifted me a modest amount for a first house deposit and as soon as I was able to I offered him the money back. He refused to take it and instead I’ve taken the money and invested it for my own son’s future. My brother was also gifted his house deposit and more over the years. Unfortunately he ran up credit card debts and then took out a 110% mortgage from Northern Rock for his house purchase. A relationship breakdown followed for him and the house had to be sold and just about break even. Anyway, over the years I’ve continued to try and be supportive but I decided I couldn’t keep enabling his poor financial behaviours and now I sleep better. We all make decisions and need to be able to live with the outcomes – it probably sounds quite harsh but you can’t help everyone.

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      • Christianity tells us all about the prodigal son – and it never seemed to make sense to me.
        But this type of resentment can fester for a long time and it only gets worse with age.
        It’s a common symptom of addiction – be it drug, drink, or in this case money! You are the bad guy because you stopped feeding their addiction and they don’t care if it’s for their own good – your just a d**k. 🙂

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