Setting terms on a loan to a friend or family member can be a big challenge. Frank explains how nudges and information can be a perfect substitute.
Another significant challenge in friends and family lending is setting terms. The idea of negotiating with a friend or family member can feel repugnant, but without terms things can get messy very quickly.
Negotiating terms is brutal
Frank's research shows that over 60% of people -- surprisingly equally distributed by lenders and borrowers -- agree that negotiating terms with a friend or family member is terrible.
We talk about the underlying psychology of it elsewhere, but the prospect of sitting "across the table" from a loved one and hammering out an interest rate and repayment schedule, is enough to deter many considering it in the first place.
In fact nearly 25% of people said this would prevent them from making or asking for a loan that they otherwise could and would make.
So almost a quarter of people could borrow from a friend -- with all the social and economic advantages, but don't because it's weird to negotiate terms.
That's a powerful thing!
But aligning expectations is incredibly important
For those who do loan money, the desire to avoid negotiating terms means they often just leave it: "we'll figure it out later". No alignment of expectations between the people involved can be a risky proposition.
Imagine you and a friend are making weekend plans on a Tuesday. Now imagine how much more likely that is to be successful if you agree on a time and place on Tuesday rather than hoping you'll figure it out once Saturday rolls around. Maybe neither you nor your friend is free at the same time this weekend. Or maybe they're in the city while you're in the country.
Simply aligning expectations can make sure that there is actually a scenario that would make both sides happy, and gives everyone some boundaries to guide their actions.
Harvard researchers have confirmed this empirically, showing that even a simple handshake agreement can increase odds of success by working to align expectations.
Informational nudges are terms without negotiation
At Frank, we use informational nudges so everyone's expectations are aligned without the need to negotiate with a friend.
It's critical to how we keep the process safe but social.
When you loan a friend money on Frank you see, on average, how much that friend (and his or her friends) borrow on average, how much interest they pay, and how long they keep the money for. This gives the lender a good sense of what to expect.
Similarly for the borrowers we'll show them how much they (and their friends) borrow, how much interest they pay and how long they keep it. Again, the expectations of the borrower is made clear and is aligned with the lender.
The borrower ultimately decides what to do but these nudges act as a powerful social cue that borrowers -- in nearly all cases so far -- are likely to follow.
So the lender knows what to expect if/when they offer and the borrower knows what to expect if/when they accept, but neither has to negotiate anything.
Sounds like a win-win to us!
Next Article: Part 5: How do I Get Paid Back Without Being a %$^? (coming next week)
Previous Article: Part 3: The Awkward ask and Offer
This is Part 4 on our series about the challenges and solutions to lending money to friends and family
Part 5: How do I Get Paid Back Without Being a %$^?
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.