So someone — a friend or family member — has asked you if they can borrow money. What if they owe you and can't pay you back? Is there a better way? Frank say yes!
You want to help but there's something in the pit of your stomach that feels weird about it. The standard "internet response" is to tell you to not mix money and friends, but is that doesn't feel right either.
Is there a better way? Frank says yes. Absolutely yes. Without a doubt there's a better way to loan money to friends!
We briefly touched on this in the 4 Myths of Lending Money to Friends and Family, but we get tons of questions on it so we wanted to break down it down further for those of you that are always getting hit up for cash.
This is the first in a series on the challenges that lie beneath mixing money and friends, and the hacks that can make lending money to a friends or family both safe and social.
Part 5: How do I Get Paid Back Without Being a %$^?
Part 6: Power Dynamics with Friends and Money
Part 7: Friendships at risk
Part 8: Something Went Wrong, Now What?
[Full disclosure, we know all this because we spend a lot of time researching and understanding how these dynamics work, then we built a platform that reflects that learning. We hope the articles are helpful, we know Frank can be too.
Part 1: The Real Problem
Lending money to friends and/or family can seem like a risky and delicate process.
On the one hand it can be a loaded time-bomb that's just waiting to explode unless you make it safe.
- What happens if something goes wrong?
- What do you do if a friend owes you and isn't paying you back?
- How do you get a friend who owes you to pay you back?
- Do you really want to chase them down over and over again for every payment?
- Do you really want to put a close relationship at risk over a few dollars?
- I'm just doing this out of the kindness of my heart, so why go through all the hassle?
It probably, maybe, hopefully won't go wrong — but what if someone owes me money and isn't paying it back? There seems to be a lot at risk and not so much to gain. If there was a way to make it safe that would be great but is there really an effective way to do that?
On the other hand it can feel weird to be too transactional with a close friend.
- Is there a way to actually make it safe without it feeling weird?
- Are you really going to write a loan agreement with your buddy?
- How do you figure out "terms" or is it taboo to even think about something like interest?
- Is it creating an unnatural power dynamic between friends?
These are all incredibly relevant questions and they're critical to what we do at Frank.
Our evidence (backed up some of the best behavioral research out there) shows that at their core, what people really need when they mix money and friends is something that is social but safe.
Lenders want to know they're going to get their money back from a friend without the hassle (or negative feeling) of being a collector. They'd appreciate a little thanks — be it in the form of money or something else — but they really just want that basic feeling of safety and security.
Borrowers want to feel like they're being treated in a respectful way. You have an existing relationship with that friend and injecting money into that relationship can change it. Often the borrowers feel the brunt of that power shift, so they want an interaction that remains social.
That's the real problem: how can you make it social but safe? How can you create some structure and formality, without going overboard?
We'll show you how as we explore the opportunity and challenges in lending and borrowing from friends and family.
Next Article: Part 2: It Could Be Awesome