You’ve probably heard many of the cautions about lending money to people you know.
As Benjamin Franklin put it, “Creditors have better memories than debtors.”
In Shakespeare’s “Hamlet,” Polonius advises his son Laertes, “Neither a borrower nor a lender be, for loan oft loses both itself and friend.”
Anecdotes abound about relationships that are ruined because of unpaid loans. But if you still feel obligated to make a loan, or guilty if you don’t, new research should convince you that there is evidence of the negative effects on the relationship between lender and borrower.
George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, and Linda Dezsö from the University of Vienna set out to measure the impact of personal loans on people’s feelings. The researchers said their investigation is the first to academically study the consequences of personal loans between friends, co-workers, siblings, and cousins.
Their study appears in the Journal of Economic Psychology and was just published online.
They wanted to know whether the participants are subject to self-serving bias when it comes to recalling aspects of the loan. And they looked at when and how loans affect the relationship. They surveyed 971 individuals .
Not surprisingly, borrowers can remember the transaction differently than lenders. They are more likely to forget having taken the loan and are more likely to view it as having been paid. They also might reframe unpaid loans as gifts.
To some extent, Loewenstein said, the research explains why lenders often feel borrowers seem cavalier. Borrowers are optimistic about their ability to pay, with 87 percent thinking they will eventually make good. But only 35 percent of lenders think they will see their money again.
The damage to relationships often starts when loans become delinquent, the study found. Lenders feel that their trust has been violated. Borrowers then become resentful of being under the yoke of the loan, Loewenstein said.
But Loewenstein and Dezsö don’t want their study to be used to eliminate lending. Rather, they hope their findings are used to help people avoid the pitfalls. They advise the following:
■ Don’t succumb to pressure to make an immediate loan. Think about the consequences.
■ Get a contract.
■ Document payments with receipts.
Most importantly, don’t lend money you have to have back. And those seeking loans from family or friends should keep this proverb in mind: “Before borrowing money from a friend, decide which you need most.”