Why Is It Unwise to Lend, Borrow or Cosign Among Family and Close Friends? – Part 1
There is no aspect of personal finances which poses greater risk to relationships than money matters among family and close friends. Family members who are in need often approach relatives who are better off asking for a loan. A brother who can’t get a car loan may ask you to be a cosigner so that he can upgrade his ride. Your sister and her husband have been told that they can get a much better interest rate on their home equity loan if they can find a credit worthy cosigner so they ask you to help them out. Family members are sometimes asked to take out loans for a relative who is in school. Another more unusual way to make oneself liable for the debts of another is to put up their criminal bail. If they don’t show up in court you will lose your money. If you express reluctance in any of these situations your family member may assure you that there is no risk because they will make the payments. If you still refuse, they may become belligerent, calling you greedy and selfish because you won’t help them out. They may even try to enlist other close relatives to pressure you to fulfill your family duty. Dave Ramsey warns that such financial matters among family members and friends “is the best way I know to lose a friendship or strain a relationship. The borrower feels awkward even being in the same room with the lender, and if something goes wrong, most friendships are destroyed.”
Scripture Explicitly Warns against Cosigning
Of all of the foolish financial errors one can make, including excessive personal debt, none is greater than making oneself liable for the debts of another person. “A man lacking in sense pledges and becomes a guarantor in the presence of his neighbor” (Prov. 17:18). Ordinarily lenders are willing (perhaps too willing) to lend money to people with good credit. A cosigner is only required in situations in which the lender is convinced that there is significant risk that the loan won’t be repaid. Your relative may have bad credit because of previous financial irresponsibility. Or the bank may realize that their income may not be enough to enable them to keep up with payments. The act of cosigning transfers the risk from the bank to you the cosigner. You then receive none of the benefits from the loan, but you bear all of the potential liabilities. Cosigning is by nature extremely risky.
Cosigning May Cost You
When the person who borrowed the money is unwilling or unable to pay the lender will come after the cosigner. You will be expected to pay the loan in full. “He who is guarantor for a stranger will surely suffer for it, but he who hates being a guarantor is secure” (Prov. 11:15). The consequences can be dire. “Do not be among those who give pledges, among those who become guarantors for debts. If you have nothing with which to pay, why should he take your bed from under you?” (Prov. 22; 26–27). I have known of cosigners who, when their relative or friend stopped paying on their car loan and the bank came after them, became angry with the bank. They should have understood what they signed and the risk they took. You can also suffer significant financial loss when the person for whom you cosigned drops out of school, skips bail, or dies. Also, cosigning may affect your credit. For example, we knew of a case when a single nurse cosigned for her parents’ mortgage loan, but then when she married she and her husband had difficulty getting their own home loan because her credit was still tied up in her parents’ house. About 40 percent of those who cosign wind up having to pay and in most of these situations relationships are damaged.
Cosigning May Also Hurt the Relative for Whom You Cosign
You may also be harming your family member or friend by allowing them to continue their own spiral of financial irresponsibility and covetousness by incurring debts for purchases they don’t need and can’t afford.
What about Lending Money to Relatives?
If you have been financially wise and have accumulated savings it is likely that needy family members and friends will approach you asking for a loan. The same principles we presented about cosigning apply here. If they have good credit and their income can support the loan payments, the bank would be willing to lend them money at a reasonable rate of interest. Thus your relative wouldn’t need to be asking you. So, this is a financially risky loan. For example, a family member might want a loan to start or expand their small business. Their pitch to you might be that the bank wants to charge them a high rate of interest while the bank is paying you a low rate of interest on your savings; therefore, you both can win. They can pay you interest which is greater than you were receiving from the bank, but less than what they would pay the bank. But there is risk. The rate of interest charged by the bank is probably based upon their evaluation of how risky the loan is. Another common situation arises when a close relative (i.e., your grown child) is in financial distress due to debt and asks you to bail them out.
Money Matters among Family and Friends Very Often Damages Relationships
The greatest harm which comes from financial matters among family members is often relational more than financial. I have observed many cases in which these arrangements have gone badly, resulting in bitterness and division. When money becomes tight borrowers often feel much less pressure to repay family members than they would a bank. While the bank could put on pressure by coming after collateral, the borrower assumes that a relative wouldn’t do that to their fellow family member. Furthermore, the borrower often thinks that the family member who lent the money has been lucky and is financially well off, so it won’t hurt for them to have to wait a bit longer. As is typical of those who are deeply in debt, the borrower may have convinced themselves that someday they will repay, even though no plan or financial discipline is in place which would actually make that happen. You, as the lender, will face temptation to anger and resentment when your family member not only doesn’t pay you, but offers little or no explanation. You may be further tempted when you see the financial lifestyle choices your family member is making while you are waiting for your money. “How can they afford a vacation to Disneyworld and new bikes for their children when they still owe us $16,000?” Surprisingly, I have observed that often the borrower who is unable or unwilling to repay a loan begins to resent the lender, even when the lender is patient. You may ask yourself, “Why does my brother avoid me and seem upset with me when he is the one who has wronged me?” I believe that Proverbs 22:7 explains why. “The rich rules over the poor and the borrower becomes the lender’s slave.” No one likes to feel like a slave or to be ruled over. Even if you are very patient, the relative who owes you money may feel shame and be tempted to resent that you, as the lender, are above him.
*Today’s post is two of three from Jim Newheiser’s new book, Money, Debt, and Finances. Come back tomorrow for part two of this article, and the third in this series. Be sure to also read the first article: Ten Principles of Biblical Wisdom about Money, Debt, and Finances.