When friends and family ask for financial help, it is difficult to refuse to lend them some cash, especially since they are important to us. Obviously, we would not want to see our loved ones struggle.

Most of us would lend money to friends and family if we had extra cash – why not lend a helping hand if we could? But, what if your loved ones ask you for an amount that you could not provide? What if they ask whether you could get a loan under your name on their behalf, or if you could be their guarantor? Naturally, many of us would end up questioning whether we should extend our helping hand for them but at the same time we would not want them to feel embarrassed by saying no, now that they have shared their struggles with us.

This article will highlight the factors that you should think through before deciding to take a loan for a friend in need.

Risk

When your peers ask you for a favour to get a loan under your name, it is not unlikely that it is because they have already tried to apply for loans but failed multiple times. Most of the time, the financial institutions reject due to the debtors’ poor repayment record or for having a too low income. Thus, these companies will avoid approving loans to stay away from customers who are struggling to repay. If this is the case with your friend, it proves that they are a high risk debtor which means a high risk for you.

Credit Record Damage

When you decide to take up a loan for a friend, it may lead you to damaging your credit record. Since the loan is taken under your name, you will be responsible for repaying the debt. Hence, if your friend is late on the repayment based on the agreement with the creditor, it will be reflected on your credit record (not to mention your relationship with the creditor). If your friend decides not to pay at all, the loan will never end and the interest will keep increasing, unless you clear the loan on your own, which will affect your financial situation and your chances of getting your own loan in the future.

The Future of Your Relationship

You may be getting the loan on behalf of your peers out of goodwill but you can never foresee how it is going to affect your relationship. Adding money into the equation may ruin your friendship. In fact, it has ruined friendships many times before. The moment your friend does not pay you back, there is a risk that the bitterness and irritation will start, and the trust between the both of you will crumble.

There are a couple of “worst case” scenarios that could happen when you borrow on behalf of your friends:

  1. Your friend goes “missing in action” when he or she is supposed to pay you.

  2. Your friend promises that he or she will pay but ends up not paying no matter how much you chase them. Nobody likes to chase for payments and nobody likes to be consistently chased!

Besides, if your friend was in a desperate financial situation which led them to having to ask you for help in the first place, they may get embarrassed for being in even more financial trouble now. This could strain your relationship now that they are indirectly indebted to you.

Alternative Options

Instead of getting a loan for your friends under your name or lending them money yourself, you can suggest them alternative solutions.

Treat It as a Gift

It is a nice gesture to help a friend in need. You may help your friend with their financial trouble using your own pocket money instead of turning to financial institutions. This is easier said than done - it is one thing to give a friend $10, but it is something different to give them $1,000. Of course, only give away what you can afford.

Recommend Debt Recovery Organisations

It is important to be a listening ear and give practical advice for a friend in need. Always try to understand more about your friends’ financial dilemma and help them find a solution themselves. When your friend comes to you for financial help, chances are that they have an outstanding debt that their salary cannot cover. Therefore, encourage your friend to approach debt recovery organisations and go for a consultation. Debtors are usually embarrassed to go for such consultations but by doing so, they would be able to better understand their own financial situation and ways to deal with their financial issues.

Summary

When you notice that your friend is struggling financially, you should check up on them more often as they may be going through a lot of stress and anxiety. If you can afford to help them, you should do so, but always be aware of the potential negative effects it could have on your credit score (if you decide to take up a loan on behalf of your friend) and / or your relationship (if you decide to lend out money to your friend yourself).

It is always preferable to get financial assistance quickly, before your friend finds himself or herself in even more debt. Do let your friend know that they are not going through this alone and make sure to recommend debt recovery companies for consultation and financial recovery.