Loaning Money to Friends and Family - Part 2: The Advantages!

If lending money to a friend can be awkward and risky, then why do it? Because when it's done right, it can be incredible!! Frank explains.

The Advantages

As Part 1 explained, it can feel weird and risky to help a family member. The prospect of getting someone to pay you back can seem like more pain than it's really worth.

So why lend money to friends and family?

Because if you do it right, it can bring two important benefits to you and the people around you:

  • (1) Economic: You can keep a lot of money within the family
  • (2) Emotional: It can make everyone feel great

Let us explain.

There's a huge economic surplus when you cut out middle men

Let's just take a walk down 'the economics of the spread' lane:

Some of that spread is because of perceived risk for the institutions and that is fair.

But a lot of it — and in the case of P2P lending, all of it — is a result of additional transaction costs (e.g., credit scoring, marketing, compliance) and profit for the middle men.

But what if you could eliminate those transaction costs and cut out the middle men?

As we've shown over and over with Frank, you can! And when you cut out the middle men, that 3–13% gets shared between you and your friends/family. How great is that?

Whether it's a high or low interest rate environment that spread will always exist. That's why — when you do it right — lending money directly to a friend or family member will always create incredible economics!.

There's a big emotional benefit

A lot of people like to focus on the economic advantage of a social lending platform, and we think that's great.

But what we hear from our users at Frank is that the biggest benefit they get is the positive feeling from being able to help out the people they care about, without the worries or stress.

As researchers from Harvard have shown, giving increases happiness. Helping out a cousin or colleague in a bind not only helps them and can earn you a little money, it can also make you feel happier too. So if you can unlock that relationship, you can capture that happiness.

And if there is a way for that cousin or colleague to feel like they helped you too, that can make them feel happier too.

That's why the most effective interaction is to let the borrower decide how much interest they want to pay.

This model allows you to feel good by helping them and it allows them to feel good by helping you right back.

Because when you structure it the right way, lending money to a friend can feel great, not weird.

And we all know a little bit of happiness is priceless. :)

Win, Win, Win, Win

A win on the economic side and a win on the human side!

Different people will strike a different balance on how much of the incentive is emotional and how much is economic. That's totally expected.

So now how do you structure it in the right way? That's why we built Frank.

Check out Part 3: The Awkward Ask or Offer details how to approach a friend as either a potential lender or a potential borrower.

— —

This is Part 2 on our series about the challenges and solutions to lending money to friends and family

Part 1: The Real Problem

Part 2: But It Could Be Awesome

Part 3: The Awkward Ask or Offer

Part 4: Terms Without Negotiation

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?

— —

D'Arcy Coolican, Co-Founder, Frank

Frank is a platform that uses behavioral research to help make it easy to lend and borrow money with friends and family.

Frank: D'Arcy

Read more posts by this author.

Subscribe to The Frank Blog

Get the latest posts delivered right to your inbox.

or subscribe via RSS with Feedly!