Friends, Credits and Consequences – The Washington Post

You’ve probably heard many of the warnings you give about lending money to people you know.

As Benjamin Franklin put it, “Creditors have better memories than debtors.”

In William Shakespeare’s Hamlet, Polonius advises his son Laertes: “Be neither a borrower nor a lender, for a loaner often loses both himself and a friend.”

There are many anecdotes about relationships ruined because of unpaid personal loans. But if you still feel obligated to take out a personal loan — or feel guilty if you don’t — new research should convince you that personal loans can have negative effects.

George Loewenstein, professor of economics and psychology at Carnegie Mellon University, and Linda Dezso of the University of Vienna set out to measure the impact of personal credit on people’s feelings. The researchers said their research is the first to look academically at the consequences of loans between friends, colleagues, siblings and cousins.

Her study – “Lender Blind Trust and Borrower Blind Spots: A Descriptive Examination of Personal Credit” – appears in the Journal of Economic Psychology and has just been published online.

The researchers examined two psychological problems. They wanted to know if the two people in the financial transaction—the lender and the borrower—have selfish biases when it comes to remembering different aspects of the loan. And they examined when and how credit affects the relationship and subsequent interactions between borrower and lender.

They asked 971 people about their experiences with personal loans. Participants completed a survey on personal loans they had granted and received over the past five years. They answered questions about the characteristics of the loans – amount, purpose, repayment amount, existence of interest and existence of a formal contract.

Unsurprisingly, at least for anyone who has personally borrowed money, borrowers may recall the transaction very differently than lenders. They are more likely to forget they took out the loan and see it as paid off. Or if the loan hasn’t been repaid, they think they’ve made more payments than they actually have. You could also redesign unpaid loans to actually be gifts.

“All of these patterns pose dangers for lenders, particularly when they hope their generosity will be rewarded with enduring appreciation,” the researchers said.

To some extent, Loewenstein said in an interview, the study explains why lenders often feel that borrowers are unconcerned about their obligations. Borrowers are optimistic about their ability to pay, with 87 percent believing they will eventually pay it back. But only 35 percent of lenders believe they’ll ever see their money again.

The damage to relationships often begins when personal loans default, the study found. Lenders feel their trust has been violated. Borrowers then resent being yoked by the loan, Loewenstein said.

“The tensions between the parties are then exacerbated by the tendency of both to project their own feelings onto the other,” Loewenstein and Dezso conclude. “Lenders project their alienation onto borrowers, while borrowers seem to have a blind spot about how their behavior affects lenders.”

So there you have it: empirical data to back up what Franklin, Shakespeare, and your mother have been saying for years. But Loewenstein and Dezso don’t want their study to be used to eliminate person-to-person lending. Rather, they hope that their findings will serve to help people understand and avoid the pitfalls.

“At the moment of borrowing, both parties very often have very unrealistic expectations,” said Loewenstein. “A lender believes the borrower is trustworthy. And the borrower is confident that he will repay the loan. People get carried away by the emotions of the moment.”

Therefore, the researchers advise the following:

• Don’t let yourself be pressured into granting an instant loan. Think about the possible negative consequences.

• Get a contract. Yes, this is personal, but it can also get ugly if you don’t put the loan terms in writing.

• Document payments. Lenders should issue a receipt and borrowers should ask for it. Though you both think you understand the loan agreement amicably, the memories fade. And then feelings get hurt.

Most importantly, don’t lend money that you need back. Just give the money to those in need.

“You should immediately write off the loan in your mind,” Loewenstein said. “If you get paid back, that’s wonderful. But take out a loan with the assumption that you will not be repaid.”

And for those seeking personal loans from family or friends, keep this adage in mind: “Before you borrow money from a friend, decide what you need most.”

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, DC 20071, or [email protected] Personal answers may not be possible, and comments or questions may be used in a future column with the author’s name unless otherwise requested. To read previous Color of Money columns, go to

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