As financial pressures mount due to inflation, consumer debt reaches historic highs, and family and friends increasingly seek financial assistance. However, providing financial support may have severe consequences for both the borrower and the lender. Here are five reasons why it's crucial to avoid loaning money to loved ones.
Amidst the escalating financial strain on Americans, consumer debt has reached unprecedented levels. Credit card debt has surpassed $1.1 trillion, auto loan delinquencies have soared to a 13-year high, and student loan debt hovers around $1.7 trillion despite government efforts to alleviate it. These statistics only scratch the surface of the hidden debt burdens faced by many Americans.
As the financial burden continues to increase, so too does the likelihood of family and friends seeking short-term or long-term financial assistance. However, indulging such requests may have dire consequences for both the borrower and the lender. Here are five reasons why it's essential to never loan money to friends and family:
1. **Uncomfortable Holidays:** Informal loans often lead to broken friendships and estranged relationships. The awkwardness of holiday gatherings can be exacerbated by the looming presence of unpaid debts.
2. **IRS Problems:** The IRS considers loans between family members and friends to be formal agreements that require a signed written contract, a fixed repayment schedule, and a minimum interest rate. Failure to comply with these requirements could result in IRS penalties and interest charges.
3. **Financial Difficulty for the Lender:** With 61% of Americans living paycheck to paycheck and inflation outpacing real wages, loaning money to others may compromise the lender's financial stability. It's crucial to prioritize your own financial security before assisting others.
4. **Repeat Borrowing:** Loans tend to be a slippery slope, with borrowers often returning for additional funds. This can strain the relationship and make it difficult for the lender to say no.
5. **Higher Risk than Cryptocurrency:** While many investors avoid Bitcoin due to perceived volatility, loaning money to friends and family carries an even higher risk of financial loss, especially for those who are financially unstable.
A recent Finder article estimates that Americans owe approximately $184 billion per year to friends and family. Unless the goal is to end relationships, it's best to avoid providing financial assistance.
It's important to remember that relationships are built on trust and love, not money. While it may be tempting to help loved ones in financial need, it's essential to proceed with caution and consider the potential consequences.
